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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 9, 1998
REGISTRATION NO.
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
UNIVERSAL HOSPITAL SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
MINNESOTA 7352 41-0760940
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
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1250 NORTHLAND PLAZA
3800 WEST 80TH STREET
BLOOMINGTON, MINNESOTA 55431-4442
(612) 893-3200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
DAVID E. DOVENBERG
UNIVERSAL HOSPITAL SERVICES, INC.
1250 NORTHLAND PLAZA
3800 WEST 80TH STREET
BLOOMINGTON, MINNESOTA 55431-4442
(612) 893-3200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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Copies to:
VINCENT J. PISANO
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
919 THIRD AVENUE
NEW YORK, NEW YORK 10022
(212) 735-3000
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CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
TITLE OF EACH CLASS AMOUNT TO BE MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED PRICE PER UNIT OFFERING PRICE(1) REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10 1/4% Senior Exchange Notes due 2008... $100,000,000 100% $100,000,000 $29,500
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(1) Estimated solely for the purpose of calculating the registration fee.
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
- ------------------
If this form is a post-effective amendment filed pursuant to rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ------------------
If delivery of the prospectus is expected to be made pursuant to rule 434,
please check the following box. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED APRIL 9, 1998
PROSPECTUS
OFFER FOR ALL OUTSTANDING 10 1/4% SENIOR NOTES DUE 2008
IN EXCHANGE FOR 10 1/4% SENIOR EXCHANGE NOTES DUE 2008
UNIVERSAL HOSPITAL SERVICES, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON 1998, 30 DAYS FROM
THE DATE OF THIS PROSPECTUS, UNLESS EXTENDED
------------------------
Universal Hospital Services, Inc., a Minnesota corporation (the "Company" or
"UHS"), hereby offers, upon the terms and subject to the conditions set forth in
this Prospectus and the accompanying Letter of Transmittal (which together
constitute the "Exchange Offer"), to exchange an aggregate principal amount of
up to $100,000,000 of its 10 1/4% Senior Exchange Notes due 2008 (the "New
Notes"), which have been registered under the Securities Act of 1933, as amended
(the "Securities Act"), for a like principal amount of its issued and
outstanding 10 1/4% Senior Notes due 2008 (the "Old Notes" and, together with
the New Notes, the "Notes") from the holders thereof. The terms of the New Notes
are identical in all material respects to the Old Notes, except for certain
transfer restrictions and registration rights relating to the Old Notes and
except that, if the Exchange Offer is not consummated by September 23, 1998, the
interest rate on the Old Notes from and including such date until but excluding
the date of consummation of the Exchange Offer will increase by 0.5%. The Old
Notes were issued by the Company on February 25, 1998 pursuant to an offering
(the "Offering"), which was exempt from registration under the Securities Act.
The Offering was made in connection with, and the proceeds from the Offering
provided a portion of the financing for, the Recapitalization (as defined) of
the Company. See "The Recapitalization."
Interest on the Notes will accrue from the date of original issuance and
will be payable semiannually in arrears on March 1 and September 1 of each year,
commencing September 1, 1998 at the rate of 10 1/4% per annum. The Notes will be
redeemable, in whole or in part, at the option of the Company on or after March
1, 2003 at the redemption prices set forth herein, plus accrued interest to the
date of redemption. In addition, the Notes are not redeemable by the Company
prior to March 1, 2003, except that, at any time on or prior to March 1, 2001,
the Company, at its option, may redeem with the net cash proceeds of one or more
Equity Offerings (as defined) up to 35% of the aggregate principal amount of the
Notes originally issued, at a redemption price equal to 110 1/4% of the
principal amount thereof, plus accrued interest to the date of redemption;
provided, that at least 65% of the aggregate principal amount of the Notes
originally issued remains outstanding immediately following such redemption.
The Notes will be general unsecured obligations of the Company, will rank
pari passu in right of payment to all existing and future unsubordinated
indebtedness of the Company and will rank senior in right of payment to all
subordinated obligations of the Company. The Notes will effectively be
subordinated to any secured indebtedness of the Company, including indebtedness
under the Revolving Credit Facility (as defined). As of December 31, 1997, on a
pro forma basis after giving effect to the Recapitalization, the Company would
have had an aggregate of $112.2 million of senior indebtedness outstanding,
which includes $12.2 million of secured indebtedness and excludes unused and
available commitments of $18.5 million under the Revolving Credit Facility. See
"Use of Proceeds," "Unaudited Pro Forma Condensed Financial Data" and
"Description of the Revolving Credit Facility."
(continued on next page)
------------------------
SEE "RISK FACTORS" COMMENCING ON PAGE 15 OF THIS PROSPECTUS FOR A
DESCRIPTION OF CERTAIN RISKS TO BE CONSIDERED BY HOLDERS WHO TENDER THEIR OLD
NOTES IN THE EXCHANGE OFFER.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE> 3
Upon a Change of Control (as defined), each holder of the Notes will have
the right to require the Company to repurchase such holder's notes at a price
equal to 101% of the principal amount thereof, plus accrued and unpaid interest
to the repurchase date. In addition, the Company may, at its option, at any time
prior to March 1, 2003 and within 180 days after a Change of Control, redeem the
Notes for an amount equal to the principal amount thereof plus accrued interest,
if any, to the redemption date, plus an Applicable Premium (as defined) The
Company will be obligated to offer to repurchase the Notes at 100% of the
principal amount thereof plus accrued and unpaid interest to the date of
repurchase in the event of certain Asset Sales (as defined). See "Description of
the Notes."
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. The New Notes will bear interest from the most recent date to which
interest has been paid on the Old Notes or, if no interest has been paid on the
Old Notes, from February 25, 1998. Accordingly, if the relevant record date for
interest payment occurs after the consummation of the Exchange Offer, registered
holders of New Notes on such record date will receive interest accruing from the
most recent date to which interest has been paid or, if no interest has been
paid, from February 25, 1998. If, however, the relevant record date for interest
payment occurs prior to the consummation of the Exchange Offer, registered
holders of Old Notes on such record date will receive interest accruing from the
most recent date to which interest has been paid or, if no interest has been
paid, from February 25, 1998. Old Notes accepted for exchange will cease to
accrue interest from and after the date of the consummation of the Exchange
Offer, except as set forth in the immediately preceding sentence. Holders of Old
Notes whose Old Notes are accepted for exchange will not receive any payment in
respect of interest on such Old Notes otherwise payable on any interest payment
date the record date for which occurs on or after consummation of the Exchange
Offer.
The New Notes are being offered hereunder in order to satisfy certain
obligations of the Company contained in the Registration Agreement dated
February 25, 1998 among the Company and BT Alex. Brown Incorporated (the
"Initial Purchaser") (the "Registration Rights Agreement"). Based on
interpretations by the staff of the Securities and Exchange Commission (the
"Commission") as set forth in no-action letters issued to third parties, the
Company believes that New Notes issued pursuant to the Exchange Offer in
exchange for Old Notes may be offered for resale, resold and otherwise
transferred by holders thereof (other than any such holder which is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that such New Notes are acquired in the ordinary
course of such holder's business and such holder has no arrangement with any
person to participate in the distribution of such New Notes. However, the
Company does not intend to request the Commission to consider, and the
Commission has not considered, the Exchange Offer in the context of a no-action
letter and there can be no assurance that the staff of the Commission would make
a similar determination with respect to the Exchange Offer as in such other
circumstances. Each holder, other than a broker-dealer, must acknowledge that it
is not engaged in, and does not intend to engage in, a distribution of such New
Notes and has no arrangement or understanding to participate in a distribution
of New Notes. If any holder is an affiliate of the Company or is engaged in or
intends to engage in or has any arrangement with any person to participate in
the distribution of the New Notes to be acquired pursuant to the Exchange Offer,
such holder (i) could not rely on the applicable interpretations of the staff of
the Commission and (ii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction, including the delivery of a prospectus which contains the
information with respect to any selling holder required by the Securities Act.
Each broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in connection
with any resale of such Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of New Notes received in
exchange for Old Notes where such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities. The Company
has agreed that, for a period of 180 days after the Expiration Date (as defined
herein), it will make this Prospectus available to any broker-dealer for use in
connection with any such resale. See "Plan of Distribution."
The Company will not receive any proceeds from the Exchange Offer. The
Company will pay all the expenses incident to the Exchange Offer. Tenders of Old
Notes pursuant to the Exchange Offer may be withdrawn at any time prior to the
Expiration Date. This Exchange Offer will remain open for thirty (30) days from
the date of this Prospectus (unless otherwise extended by the Company). The
Registration Statement of which this Prospectus constitutes a part will remain
in effect until the consummation of the Exchange Offer which will occur promptly
after the Expiration Date. In the event the Company terminates the Exchange
Offer and does not accept for exchange any Old Notes, the Company will promptly
return the Old Notes to the holders thereof. See "The Exchange Offer."
Prior to the Exchange Offer there has been no established trading market for
the Old Notes or the New Notes. Although the Initial Purchaser has advised the
Company that it currently intends to make a market in the New Notes, it is not
obligated to do so and may discontinue such market-making at any time without
notice. Accordingly, no assurance can be given as to the future development of
an active market for the New Notes, or the ability of the holders of New Notes
to sell their New Notes or the price that such holders may obtain for their New
Notes upon any sale. The Company does not intend to apply for listing of the New
Notes on any securities exchange or for quotation through any automated
quotation system. To the extent that a market for the New Notes does develop,
the New Notes could trade at a discount from their principal amount. see "Risk
Factors -- Lack of Established Market for the Notes."
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AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act, with respect to the
New Notes being offered by this Prospectus. This Prospectus does not contain all
the information set forth in the Registration Statement and the exhibits
thereto, to which reference is hereby made. Any statements made in this
Prospectus concerning the provisions of certain documents are not necessarily
complete and, in each instance, reference is made to the copy of such document
filed as an exhibit to the Registration Statement.
The Registration Statement and the exhibits thereto may be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and will
also be available for inspection and copying at the regional offices of the
Commission located at 7 World Trade Center, New York, New York 10048 and at
Citicorp Center, 500 West Madison Street (Suite 1400), Chicago, Illinois 60661.
Copies of such material may also be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. The Company is not currently subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). As a result of the Exchange Offer, the Company will become subject to
such requirements and, in accordance therewith, will file periodic reports and
other information with the Commission. The Commission maintains a Web site that
contains reports, proxy and information statements and other information
regarding registrants, such as the Company, that file electronically with the
Commission and the address of such site is http://www.sec.gov. In the event the
Company is not required to be subject to the reporting requirements of the
Exchange Act in the future, the Company will be required under the Indenture,
pursuant to which the Old Notes have been, and the New Notes will be, issued, to
continue to file with the Commission and to furnish to holders of the Notes the
information, documents and other reports specified in Sections 13 and 15(d) of
the Exchange Act, including reports on Form 10-K, 10-Q and 8-K, for so long as
any Notes are outstanding.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial data, including
the financial statements and notes thereto, appearing elsewhere in this
Prospectus. The Company's fiscal year ends December 31 of each year. Other than
in "Principal Shareholders", the information contained herein does not reflect a
10 for 1 stock split of the Common Stock, par value $.01 per share, of the
Company (the "Common Stock") effected February 25, 1998.
THE COMPANY
The Company is a leading nationwide provider of movable medical equipment
to more than 2,800 hospitals and alternate care providers through its equipment
rental and outsourcing programs. The Company's principal rental program is its
innovative Pay-Per-Use(TM) program whereby health care providers are charged a
per use rental fee based on daily use of equipment per patient. The Company also
offers other rental programs whereby customers are charged on a daily, weekly or
monthly basis. All of the Company's rental programs include a comprehensive
range of support services which include equipment delivery, training, technical
and educational support, inspection, maintenance, and comprehensive
documentation. The Company also offers total equipment outsourcing through its
Asset Management Partnership ("AMP") program whereby the Company provides,
maintains, manages and tracks substantially all, or a significant portion of, a
customer's movable medical equipment. In addition, the Company sells disposable
supplies related to the equipment it rents. The Company is able to maintain high
utilization of its rental equipment through pooling and redeploying its
equipment among a diverse customer base and adjusting pricing on a customer by
customer basis to compensate for varying utilization levels.
The Company believes that its equipment rental and outsourcing programs are
more cost effective for health care providers than the purchase or lease of
movable medical equipment for the following reasons:
- Increase Equipment Utilization Rates. Health care providers' movable
medical equipment needs fluctuate on a daily basis due to varying patient
census levels and severity of illness and condition. Therefore, a health
care provider's equipment utilization will vary for a given fixed level
of equipment. By utilizing the Company's rental programs, health care
providers can increase the utilization rates of their medical equipment
which allows them to reduce capital expenditures and related costs.
Furthermore, the Company's rental programs, especially its Pay-Per-Use
program, allow customers to more effectively match the costs of variable
equipment use with actual patient charges.
- Outsource Support Services. The Company's full range of support services
are included in its rental fee and the Company believes it can often
provide these support services at a lower cost than customers can
themselves. Accordingly, health care providers can reduce the substantial
operating costs associated with equipment ownership or lease.
- Minimize Equipment Obsolescence Risk. Health care providers can
effectively eliminate the risk of equipment obsolescence through the
Company's short-term rental and Pay-Per-Use programs. The risk of
obsolescence to the Company is reduced because the Company can maintain
high utilization of its equipment.
The Company owns a rental pool of over 56,000 pieces of movable medical
equipment in four primary categories: critical care, monitoring, respiratory
therapy and newborn care. The Company, which is one of only two national
providers of movable medical equipment rental and outsourcing programs,
currently operates through 46 district offices and eight regional service
centers, serving customers in 46 states and the District of Columbia.
MARKET OVERVIEW
Historically, hospitals have purchased a majority of their movable medical
equipment. In response to increasing cost containment pressures, however,
hospitals and other health care providers are seeking ways to reduce their
movable equipment purchases and related capital and service costs. In making
medical
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equipment procurement decisions, hospitals and other health care providers
consider factors such as utilization levels of equipment and the costs of
quality assurance, regulatory documentation, maintenance, repair, storage and
obsolescence. The Company estimates that utilization rates of movable medical
equipment owned by hospitals average between 45-68%, based on over 300 studies
conducted by the Company and/or these hospitals. The Company believes that such
studies show that hospitals can reduce their capital expenditures and related
costs associated with movable medical equipment by participating in rental
programs such as those offered by the Company. In addition, these programs allow
health care providers to outsource the servicing of their movable medical
equipment, which can reduce their operating costs.
COMPANY STRENGTHS
The Company attributes its historical success and its significant
opportunities for continued growth and increased profitability to the following
strengths:
SUPERIOR SERVICE AND STRONG CUSTOMER RELATIONSHIPS. The Company distinguishes
itself by being a leading service company rather than solely an equipment rental
provider and competes on the basis of the value-added, full-service features of
its rental programs in addition to price. The Company's support services include
24-hour-a-day, 365-day-a-year delivery of "patient ready" equipment, technical
support, training in equipment use, quality assurance services, regular
inspections and maintenance of all equipment rented from the Company. As a
result of its focus on service, the Company enjoys strong customer
relationships, as evidenced by the fact that 85 of the Company's 100 largest
customers as of January 1, 1992 are still customers today.
NATIONAL NETWORK. The Company is one of only two national providers of a broad
range of movable medical equipment rental and outsourcing programs. The
Company's national network of 46 district offices and eight regional service
centers serves hospital and alternate care customers in 46 states and the
District of Columbia. This broad network allows the Company to meet the
equipment rental and service needs of independent health care facilities,
national and regional health care chains and group purchasing organizations. The
Company's national network also enables it to efficiently redeploy equipment
throughout its system in order to maintain high levels of equipment utilization
and customer service.
SOPHISTICATED USE OF INFORMATION TECHNOLOGY. Through its commitment to
information technology, the Company has developed proprietary systems designed
to enhance the Company's and its customers' operating efficiencies. The Company
maintains a complete service history of all rental equipment, including data on
length of placement, transfers, modifications, repairs, maintenance and
inspections which is used to monitor and schedule preventive maintenance and
safety testing programs as well as to maximize equipment utilization. In
addition, the Company's systems provide information that helps customers meet
their equipment documentation needs under applicable industry standards and
regulations. The Company also offers its customers software that allows a health
care provider to track location, utilization and availability of all equipment
rented, owned or leased by that health care provider. These proprietary systems
were designed by the Company's MIS staff which continues to upgrade these
systems and develop new applications.
DEPTH AND BREADTH OF EQUIPMENT RENTAL POOL; PURCHASING POWER. The Company owns
a rental pool of over 56,000 pieces of movable medical equipment in four primary
categories: critical care, monitoring, respiratory therapy and newborn care. The
Company's diversified equipment rental pool includes equipment purchased from
over 50 suppliers in 1997 and enables the Company to offer its customers
numerous models from different manufacturers within each primary equipment
category. The breadth of its product offerings provides the Company with a
competitive strength compared to manufacturers and regional equipment rental
firms that may offer a limited range of models within an equipment category. In
addition, the amount of the Company's annual equipment purchases enables it to
obtain favorable pricing terms from many equipment vendors. As of December 31,
1997, approximately 60% of the Company's rental pool (valued at original cost)
was purchased within the last four years. The Company generally purchases only
new equipment for its rental pool.
EXPERIENCED AND COMMITTED MANAGEMENT TEAM. As part of the Recapitalization, the
Company installed a new senior management team comprised of existing senior
operating managers who have an average of 20 years of experience with the
Company. This team, led by David E. Dovenberg, previously the Company's
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CFO who became President and CEO, intends to refocus and expand the Company's
growth strategy. The new senior management team and certain other continuing
members of management (collectively, the "Management Investors") retained 100%
of their shares and options in the Company which, after the Recapitalization and
together with the Management Investors' new investments, represent approximately
20% of the capital stock of the Company on a fully diluted basis.
ATTRACTIVE RETURN ON RENTAL POOL. The Company's pricing strategy is designed to
generate a pay-back period which is substantially shorter than the useful life
of a particular piece of equipment. The Company calculates its rental rates to
recoup the equipment's purchase price generally within 16 to 18 months.
Excluding related service and support costs, the Company achieves a two year
pay-back period on the original purchase price of the entire rental pool. In
contrast, the average useful life of the equipment in the rental pool has
historically been 8.3 years.
LARGE AND DIVERSIFIED CUSTOMER BASE. The Company provides movable medical
equipment to over 1,670 hospitals and over 1,190 alternate care providers
including home care providers, nursing homes, surgicenters, subacute care
facilities and outpatient centers throughout the United States. In 1997, the
Company's top ten customers accounted for less than 14% of total revenues.
GROWTH STRATEGY
The Company believes that continuing trends toward an aging population,
increased life expectancy and managed care will provide significant growth
opportunities in both hospital and alternate care settings. The Company's
strategy is to achieve continued growth by: (i) increasing business with
existing customers; (ii) providing comprehensive equipment management programs;
(iii) developing business with new customers; (iv) establishing new district
offices; (v) pursuing strategic alliances; and (vi) pursuing strategic
acquisitions.
INCREASE BUSINESS WITH EXISTING CUSTOMERS. The Company seeks to increase the
amount of business it conducts with existing customers by providing additional
equipment to these customers and reaching additional departments within its
existing hospital customer base. Because these customers are familiar with the
Company's programs and their benefits, the Company believes that its existing
customer base represents a significant expansion opportunity. The Company
generates an average monthly rental revenue per customer census bed (i.e.,
occupied bed) of approximately $19. However, the Company's two largest district
offices generate an average monthly rental revenue per customer census bed of
approximately $76.
PROVIDE COMPREHENSIVE EQUIPMENT MANAGEMENT PROGRAMS. The Company offers a total
equipment management outsourcing program called Asset Management Partnership, or
AMP. Through this program, the Company provides, maintains, manages and tracks
substantially all, or a significant portion of, a customer's movable medical
equipment. The AMP program allows health care providers to control capital
spending and certain operating costs through outsourcing and improved
utilization. The Company plans to increase conversions of existing customers
into the AMP program as well as promote the AMP program to a target list of
potential customers. As of December 31, 1997, the Company had 15 AMP accounts,
ten of which the Company has added since January 1, 1996. The average monthly
rental revenue at these ten accounts increased 122% after conversion to AMP
accounts.
DEVELOP BUSINESS WITH NEW CUSTOMERS. The Company plans to further penetrate the
hospital and alternate care markets by establishing new customer relationships
either individually or through group purchasing organizations. To date, the
Company has signed agreements with several independent group purchasing
organizations, including Premier Purchasing Partners L.P. ("Premier"), the
nation's largest health care alliance enterprise, which gives the Company
preferred supplier status to over 2,100 hospitals in its existing markets. The
Company also plans to expand business with alternate care providers which
increased to 16% of rental revenue for 1997 from 4% in 1992.
ESTABLISH NEW DISTRICT OFFICES. In order to expand its geographic coverage, the
Company plans to establish two new district offices in 1998 and three to four
new district offices in each of the subsequent several years. In choosing
locations for its district offices, the Company considers the nature and size of
the potential customer
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market, customer concentration within the market, demographics and vendor
relationships. While the major metropolitan areas will remain a primary focus
for expansion, regional clusters of hospitals are also expected to provide
attractive expansion opportunities.
PURSUE STRATEGIC ALLIANCES. The Company intends to pursue strategic alliances
with major manufacturers of movable medical equipment. The nature of these
alliances could include joint marketing arrangements and/or revenue sharing
agreements whereby the Company's rental programs and services would be marketed
by the manufacturer's sales distribution network. Under these agreements, such
manufacturers would not offer the rental programs and services of any other
company.
PURSUE STRATEGIC ACQUISITIONS. The Company plans to pursue strategic
acquisitions that will increase its market share in existing markets, enable the
Company to more quickly penetrate new markets and/or improve the Company's
overall operating efficiencies. In August 1996, the Company acquired Biomedical
Equipment Rental and Sales, Inc. ("BERS") which had revenues of approximately
$5.7 million in 1996. The acquisition of BERS greatly expanded the Company's
market share and service capabilities in several Southeastern markets.
THE RECAPITALIZATION
The Recapitalization was effected through the merger (the "Merger") of UHS
Acquisition Corp., a newly-formed Minnesota corporation ("Merger Sub")
controlled by J.W. Childs Equity Partners, L.P. ("Childs"), with and into the
Company (the Merger, together with the financings and related transactions
described below, the "Recapitalization"). In connection with the
Recapitalization: (i) the Company's existing shareholders (other than the
Management Investors) received, in consideration for the cancellation of
approximately 5.3 million shares of the Company's Common Stock and options to
purchase approximately 344,000 shares of the Common Stock, cash in the aggregate
amount of approximately $84.7 million (net of aggregate option exercise price),
or $15.50 per share; (ii) the Company repaid outstanding borrowings of
approximately $35.5 million ($33.3 million as of December 31, 1997 on a pro
forma basis) under existing loan agreements; (iii) the Company paid estimated
fees and expenses of $11.5 million related to the Recapitalization; and (iv) the
Company paid approximately $3.3 million in severance payments to certain
non-continuing members of management. In order to finance the Recapitalization,
the Company: (i) received an equity contribution of approximately $21.3 million
in cash from Childs and affiliates and the Management Investors; (ii) issued
$100.0 million in aggregate principal amount of Old Notes in the Offering; and
(iii) borrowed approximately $14.3 million ($11.5 million as of December 31,
1997 on a pro forma basis) under the Revolving Credit Facility. In addition, the
Management Investors retained their existing shares of Common Stock and options
to purchase shares of Common Stock which have a total value of $3.7 million
based upon the Merger Consideration (as defined) and represent, together with
new investments by such persons, approximately 20% of the capital stock of the
Company on a pro forma, fully diluted basis. Following the Recapitalization,
Childs and affiliates and the Management Investors hold securities representing
approximately 80% and 20%, respectively, of the outstanding voting stock of the
Company on a fully diluted basis. See "The Recapitalization," "Management" and
"Principal Shareholders."
The Merger was effected pursuant to the Agreement and Plan of Merger, dated
as of November 25, 1997, by and among Merger Sub, Childs and the Company (the
"Merger Agreement"). The Merger Agreement provided that (i) Merger Sub would be
merged with and into the Company, with the Company as the surviving corporation,
and (ii) each outstanding share of Common Stock (other than shares owned
directly or indirectly by Childs or the Company, shares in respect of which
appraisal rights are properly exercised and shares held by the Management
Investors), together with certain associated shareholders' rights, would be
converted into the right to receive $15.50 in cash (the "Merger Consideration").
As of the effective time of the Recapitalization, the shares of the Common Stock
were no longer quoted on The Nasdaq National Stock Market (the "Nasdaq Stock
Market"), and the registration of the Common Stock under the Exchange Act was
terminated.
7
<PAGE> 9
THE INVESTOR
Childs is a $463 million institutional private equity fund managed by J.W.
Childs Associates, L.P., a Boston-based private investment firm ("Childs
Associates"). Childs invests in equity positions primarily in established
middle-market growth companies. Childs' investment strategy is to leverage on
the operating and financial experience of its partners and to invest, along with
management, in growing companies with a history of profitable operations. In
addition to seven partners with financial backgrounds, Childs has three
"operating" partners who have each had prior experience as the chief executive
officer of a successful leveraged buyout. Its principal executive offices are
located at One Federal Street, 21st Floor, Boston, Massachusetts 02110. Childs
is a Delaware limited partnership.
THE COMPANY
The Company's executive offices are located at 1250 Northland Plaza, 3800
West 80th Street, Bloomington, Minnesota 55431-4442. The Company's telephone
number is (612) 893-3200.
8
<PAGE> 10
THE EXCHANGE OFFER
Securities Offered......... Up to $100,000,000 aggregate principal amount of
10 1/4% Senior Exchange Notes due 2008. The terms
of the New Notes and the Old Notes are identical in
all material respects, except for certain transfer
restrictions and registration rights relating to
the Old Notes and except that, if the Exchange
Offer is not consummated by September 23, 1998, the
interest rate on the Old Notes from and including
such date until but excluding the date of
consummation of the Exchange Offer will increase by
0.5%. See "-- Summary Description of the New Notes"
and "Description of the Notes -- General."
The Exchange Offer......... The New Notes are being offered in exchange for a
like aggregate principal amount of Old Notes. The
issuance of the New Notes is intended to satisfy
obligations of the Company contained in the
Registration Rights Agreement. For procedures for
tendering the Old Notes, see "The Exchange
Offer -- Procedures for Tendering Old Notes."
Tenders; Expiration Date;
Withdrawal............... The Exchange Offer will expire at 5:00 p.m. New
York City time, on , 1998, or such
later date and time to which it is extended. The
tender of Old Notes pursuant to the Exchange Offer
may be withdrawn at any time prior to the
Expiration Date. Any Old Notes not accepted for
exchange for any reason will be returned without
expense to the tendering holder thereof as promptly
as practicable after the expiration or termination
of the Exchange Offer. See "The Exchange Offer --
Terms of the Exchange Offer; Period for Tendering
Old Notes" and "The Exchange Offer -- Withdrawal."
Certain Conditions to
Exchange Offer........... The Company shall not be required to accept for
exchange, or to issue New Notes in exchange for,
any Old Notes and may terminate or amend the
Exchange Offer if at any time before the acceptance
of the Old Notes for exchange or the exchange of
the New Notes for such Old Notes certain events
have occurred, which in the reasonable judgment of
the Company, make it inadvisable to proceed with
the Exchange Offer and/or with such acceptance for
exchange or with such exchange. Such events include
(i) any threatened, instituted or pending action
seeking to restrain or prohibit the Exchange Offer,
(ii) a general suspension of trading in securities
on any national securities exchange or in the over-
the-counter market, (iii) a general banking
moratorium, (iv) the commencement of a war or armed
hostilities involving the United States and (v) a
material adverse change or development involving a
prospective material adverse change in the
Company's business, properties, assets,
liabilities, financial condition, operations,
results of operations or prospects that may affect
the value of the Old Notes or the New Notes. In
addition, the Company will not accept for exchange
any Old Notes tendered, and no New Notes will be
issued in exchange for any such Old Notes, at any
such time any stop order shall be threatened or in
effect with respect to the Registration Statement
of which this Prospectus constitutes a part or the
qualification of the Indenture under the Trust
Indenture Act of 1939. See "The Exchange
Offer -- Certain Conditions to the Exchange Offer."
9
<PAGE> 11
Federal Income Tax
Consequences............. The exchange pursuant to the Exchange Offer will
not result in gain or loss to the holders or the
Company for federal income tax purposes. See
"Certain U.S. Federal Income Tax Considerations."
Use of Proceeds............ There will be no proceeds to the Company from the
exchange pursuant to the Exchange Offer. See "Use
of Proceeds."
Exchange Agent............. First Trust National Association is serving as
exchange agent (the "Exchange Agent") in connection
with the Exchange Offer.
CONSEQUENCES OF EXCHANGING OR FAILURE TO EXCHANGE OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the provisions in
the Indenture regarding transfer and exchange of the Old Notes and the
restrictions on transfer of such Old Notes as set forth in the legend thereon as
a consequence of the issuance of the Old Notes pursuant to exemptions from, or
in transactions not subject to, the registration requirements of the Securities
Act and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not currently anticipate that
it will register Old Notes under the Securities Act. See "Description of the
Notes -- Registration Rights."
Based on interpretations by the staff of the Commission, as set forth in
no-action letters issued to third parties, the Company believes that New Notes
issued pursuant to the Exchange Offer in exchange for Old Notes may be offered
for resale, resold or otherwise transferred by holders thereof (other than any
holder which is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holders' business and such
holders have no arrangement with any person to participate in the distribution
of such New Notes. However, the Company does not intend to request the
Commission to consider, and the Commission has not considered, the Exchange
Offer in the context of a no-action letter and there can be no assurance that
the staff of the Commission would make a similar determination with respect to
the Exchange Offer as in such other circumstances. Each holder, other than a
broker-dealer, must acknowledge that it is not engaged in, and does not intend
to engage in, a distribution of New Notes and has no arrangement or
understanding to participate in a distribution of New Notes. If any holder is an
affiliate of the Company, is engaged in or intends to engage in or has any
arrangement or understanding with respect to the distribution of the New Notes
to be acquired pursuant to the Exchange Offer, such holder (i) could not rely on
the applicable interpretations of the staff of the Commission and (ii) must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. Each broker-dealer
that receives New Notes for its own account in exchange for Old Notes must
acknowledge that such Old Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities and that it will deliver
a prospectus in connection with any resale of such New Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that, for a
period of 180 days after the Expiration Date, it will make this Prospectus
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution." In addition, to comply with the state securities laws,
the New Notes may not be offered or sold in any state unless they have been
registered or qualified for sale in such state or an exemption from registration
or qualification is available and is complied with. The offer and sale of the
New Notes to "qualified institutional buyers" (as such term is defined under
Rule 144A of the Securities Act) is generally exempt from registration or
qualification under the state securities laws. The Company currently does not
intend to register or qualify the sale of the New Notes in any state where an
exemption from registration or qualification is required and not available. See
"The Exchange Offer -- Consequences of Exchanging Old Notes" and "Description of
the Notes -- Registration Rights."
10
<PAGE> 12
SUMMARY DESCRIPTION OF THE NEW NOTES
The terms of the New Notes and the Old Notes are identical in all material
respects, except for certain transfer restrictions and registration rights
relating to the Old Notes and except that, if the Exchange Offer is not
consummated by September 23, 1998, the interest rate on the Old Notes from and
including such date until but excluding the date of consummation of the Exchange
Offer will increase by 0.5%. The New Notes will bear interest from the most
recent date to which interest has been paid on the Old Notes or, if no interest
has been paid on the Old Notes, from February 25, 1998. Accordingly, if the
relevant record date for interest payment occurs after the consummation of the
Exchange Offer, registered holders of New Notes on such record date will receive
interest accruing from the most recent date to which interest has been paid or,
if no interest has been paid, from February 25, 1998. If, however, the relevant
record date for interest payment occurs prior to the consummation of the
Exchange Offer registered holders of Old Notes on such record date will receive
interest accruing from the most recent date to which interest has been paid or,
if no interest has been paid, from February 25, 1998. Old Notes accepted for
exchange will cease to accrue interest from and after the date of consummation
of the Exchange Offer, except as set forth in the immediately preceding
sentence. Holders of Old Notes whose Old Notes are accepted for exchange will
not receive any payment in respect of interest on such Old Notes otherwise
payable on any interest payment date the record date for which occurs on or
after consummation of the Exchange Offer.
Notes Offered.............. Up to $100,000,000 aggregate principal amount of
10 1/4% Senior Notes due 2008.
Maturity Date.............. March 1, 2008.
Interest Payment Dates..... Interest on the Notes will accrue from the date of
original issuance (the "Issue Date") and will be
payable semi-annually in arrears on March 1 and
September 1 of each year, commencing September 1,
1998.
Optional Redemption........ The Notes will be redeemable, in whole or in part,
at the option of the Company on or after March 1,
2003 at the redemption prices set forth herein,
plus accrued interest to the date of redemption. In
addition, the Notes are not redeemable by the
Company prior to March 1, 2003, except that, at any
time on or prior to March 1, 2001, the Company, at
its option, may redeem, with the net cash proceeds
of one or more Equity Offerings (as defined) up to
35% of the aggregate principal amount of the Notes
originally issued, at a redemption price equal to
110 1/4% of the principal amount thereof, plus
accrued interest to the date of redemption;
provided that at least 65% of the aggregate
principal amount of the Notes originally issued
remains outstanding immediately following such
redemption. See "Description of the
Notes -- Redemption."
Change of Control.......... Upon a Change of Control (as defined), each holder
of the Notes will have the right to require the
Company to repurchase such holder's Notes at a
price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest to the
repurchase date. In addition, the Company may, at
its option, at any time prior to March 1, 2003 and
within 180 days after a Change of Control, redeem
the Notes for an amount equal to the principal
amount thereof plus accrued and unpaid interest, if
any, to the redemption date, plus an Applicable
Premium (as defined) to be based on the greater of
(i) 1.0% of the then outstanding principal amount
of such Notes and (ii) the excess of (A) the
present value at such time of (1) the redemption
price of such Notes at March 1, 2003 plus (2) all
remaining required interest payments due on such
Notes through March 1, 2003, computed using a
discount rate equal to the Treasury Rate (as
defined) plus 50 basis points, over (B) the then
outstanding principal amount of such Notes. See
"Description of the Notes -- Change of Control."
11
<PAGE> 13
Ranking.................... The Notes will be general unsecured obligations of
the Company and will rank pari passu in right of
payment to all existing and future unsubordinated
indebtedness of the Company and will rank senior in
right of payment to all subordinated obligations of
the Company. The Notes will effectively be
subordinated to any secured indebtedness of the
Company, including indebtedness under the Revolving
Credit Facility (as defined). As of December 31,
1997, on a pro forma basis after giving effect to
the Recapitalization, the Company would have had an
aggregate of $112.2 million of senior indebtedness
outstanding, which includes $12.2 million of
secured indebtedness and excludes unused and
available commitments of $18.5 million under the
Revolving Credit Facility. See "Use of Proceeds,"
"Capitalization," "Unaudited Pro Forma Condensed
Financial Data" and "Description of the Revolving
Credit Facility."
Certain Covenants.......... The Indenture contains certain covenants with
respect to the Company and its subsidiaries that
restrict, among other things, (a) the incurrence of
additional indebtedness, (b) the payment of
dividends and other restricted payments, (c) the
creation of certain liens, (d) the use of proceeds
from sales of assets and subsidiary stock and (e)
transactions with affiliates. The Indenture also
restricts the Company's ability to consolidate or
merge with or into, or to transfer all or
substantially all of its assets to, another person.
In addition, under certain circumstances, the
Company will be required to offer to purchase the
Notes, in whole or in part, at a purchase price
equal to 100% of the principal amount thereof, plus
accrued and unpaid interest to the date of
repurchase, with the proceeds of certain Asset
Sales. These restrictions and requirements are
subject to a number of important qualifications and
exceptions. See "Description of the
Notes -- Certain Covenants."
Registration Rights........ Holders of New Notes are not entitled to any
registration rights with respect to the New Notes.
Pursuant to the Registration Rights Agreement, the
Company agreed that it would, at its cost, use its
best efforts to cause a registration statement to
be declared effective under the Securities Act for
the exchange of Old Notes for registered notes. The
Registration Statement of which this Prospectus is
a part constitutes the registration statement for
purposes of the Registration Rights Agreement.
Under certain circumstances, certain holders of
Notes (including holders who may not participate in
the Exchange Offer or who may not freely resell New
Notes received in the Exchange Offer) may require
the Company to use its best efforts to file, and
cause to become effective, a shelf registration
statement under the Securities Act, which would
cover resales of Notes by such holders. See
"Description of the Notes -- Registration Rights."
For additional information regarding the Notes, see "Description of the
Notes."
RISK FACTORS
Prospective holders of New Notes should consider carefully all of the
information set forth in this Prospectus and, in particular, should evaluate the
specific factors set forth under "Risk Factors" before making a decision to
tender their Old Notes in the Exchange Offer.
12
<PAGE> 14
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The summary historical and unaudited pro forma financial data presented
below, excluding rental equipment units and EBITDA and related data, are derived
from the audited financial statements of the Company (the "Financial
Statements") and the unaudited pro forma financial statements of the Company,
which are presented elsewhere herein. The unaudited pro forma financial data are
not necessarily indicative of the Company's financial position or results of
operations that might have occurred had the transactions they give effect to
been completed as of the dates indicated and do not purport to represent what
the Company's financial position or results of operations might be for any
future period or date. For additional information see "Capitalization,"
"Selected Historical Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
PRO FORMA
1995 1996 1997 1997(1)
-------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Equipment rentals......................................... $ 45,870 $ 50,743 $ 54,489 $54,489
Sales of supplies and equipment, and other................ 7,166 6,198 5,586 5,586
-------- -------- -------- -------
Total revenues.............................................. 53,036 56,941 60,075 60,075
-------- -------- -------- -------
Costs of rentals and sales:
Cost of equipment rentals................................. 11,841 13,332 13,577 13,577
Rental equipment depreciation............................. 10,800 12,603 14,435 14,435
Cost of supplies and equipment sales...................... 5,352 4,423 3,838 3,838
Write-down of DPAP inventories(2)......................... -- 2,213 -- --
-------- -------- -------- -------
Total costs of rentals and sales............................ 27,993 32,571 31,850 31,850
-------- -------- -------- -------
Gross profit................................................ 25,043 24,370 28,225 28,225
Selling, general and administrative expenses................ 18,560 19,695 18,448 17,462
Shareholder value expenses(3)............................... -- 306 1,719 --
-------- -------- -------- -------
Operating income............................................ 6,483 4,369 8,058 10,763
-------- -------- -------- -------
Interest expense............................................ 1,784 2,518 3,012 12,035
-------- -------- -------- -------
Income (loss) before provision (benefit) for income taxes... 4,699 1,851 5,046 (1,272)
-------- -------- -------- -------
Provision (benefit) for income taxes........................ 1,949 919 2,347 (307)
-------- -------- -------- -------
Net income (loss)........................................... $ 2,750 $ 932 $ 2,699 $ (965)
======== ======== ======== =======
OTHER DATA:
Net cash provided by operating activities................... $ 13,071 $ 14,657 $ 20,001 --
Net cash used in investing activities....................... (19,725) (26,859) (18,026) --
Net cash (used in) provided by financing activities......... 6,654 12,400 (2,172) --
EBITDA(4)................................................... 18,246 18,266 24,129 $26,834
Adjusted EBITDA(5).......................................... 18,246 20,785 25,848 26,834
Adjusted EBITDA margin(6)................................... 34.4% 36.5% 43.0% 44.7%
Ratio of earnings to fixed charges(7)....................... 3.6 2.7 3.2 0.9
Depreciation and amortization............................... $ 11,763 $ 13,897 $ 16,071 $16,071
Capital expenditures........................................ 19,911 15,210 19,144 19,144
Pro forma cash interest expense(8).......................... -- -- -- 11,342
Ratio of Adjusted EBITDA to pro forma cash interest
expense................................................... -- -- -- 2.4x
Ratio of pro forma total debt to Adjusted EBITDA............ -- -- -- 4.2x
Rental equipment (units at end of period)................... 45,000 52,000 56,000 56,000
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1997
1995 1996 1997 PRO FORMA(1)
------- ------- -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital(9).......................................... $ 5,059 $ 8,573 $ 7,617 $ 9,703
Total assets................................................ 66,849 79,707 81,186 89,033
Total debt.................................................. 23,588 37,150 33,945 112,157
Shareholders' equity (deficiency)........................... 28,712 29,128 33,000 (36,889)
</TABLE>
13
<PAGE> 15
- ---------------
(1) Pro forma financial data are presented as if consummation of the
Recapitalization occurred at the beginning of the applicable period (and in
the case of balance sheet data at the end of such period). Pro forma
financial data are provided for comparative purposes only and are not
necessarily indicative of the actual results that would have been achieved
had the Recapitalization occurred on the date indicated or that may be
achieved in the future.
(2) The Company experienced declining sales of Demand Positive Airway Pressure
("DPAP") devices for adult obstructive sleep apnea during 1996. Because
market acceptance of the DPAP devices did not meet expectations, the
Company's assessment resulted in a write-down of $2.2 million in 1996.
(3) Reflects shareholder value expenses, consisting primarily of legal,
investment banking and special committee fees, incurred by the Company in
the process of exploring strategic alternatives to enhance shareholder
value. Pro forma results for the year ended December 31, 1997 exclude $1.7
million in shareholder value expenses.
(4) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization. Management believes that EBITDA is generally
accepted as providing useful information regarding a company's ability to
service and/or incur debt. However, EBITDA should not be considered in
isolation or as a substitute for net income, cash flows or other income or
cash flow data prepared in accordance with generally accepted accounting
principles ("GAAP") or as a measure of a company's profitability or
liquidity.
(5) Adjusted EBITDA reflects EBITDA, adjusted to exclude the write-down of DPAP
inventories of $2.2 million for 1996 and shareholder value expenses of $0.3
million, and $1.7 million for the years ended December 31, 1996 and 1997,
respectively. Adjusted EBITDA should not be considered in isolation or as a
substitute for net income, cash flows or other income or cash flow data
prepared in accordance with GAAP or as a measure of a company's
profitability or liquidity.
(6) Adjusted EBITDA margin represents the ratio of Adjusted EBITDA to total
revenues.
(7) For the purpose of determining the ratio of earnings to fixed charges,
earnings consist of income before income taxes, fixed charges, write-down of
DPAP inventories and shareholder value expenses. Fixed charges consist of
interest expense, which includes the amortization of deferred debt issuance
costs.
(8) Pro forma cash interest expense is defined as interest expense less
amortization of debt issuance costs. Interest expense was calculated using
10.25% for the Notes, 8.25% for borrowings under the Revolving Credit
Facility and a 0.50% commitment fee on the unused portion thereunder. This
calculation also includes an estimate of interest expense related to
seasonal borrowings.
(9) Represents total current assets (excluding cash and cash equivalents) less
total current liabilities, excluding current portion of long-term debt.
14
<PAGE> 16
RISK FACTORS
Prospective holders of New Notes should consider carefully all of the
information set forth in this Prospectus and, in particular, should evaluate the
following risks before tendering their Old Notes in the Exchange Offer, although
the risk factors set forth below (other than "-- Consequences of Failure to
Exchange Old Notes") are generally applicable to the Old Notes as well as the
New Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the provisions in
the Indenture regarding transfer and exchange of the Old Notes and the
restrictions on transfer of such Old Notes as set forth in the legend thereon as
a consequence of the issuance of the Old Notes pursuant to exemptions from, or
in transactions not subject to, the registration requirements of the Securities
Act and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless reregistered under the Securities Act, except pursuant
to an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not currently anticipate that
it will register Old Notes under the Securities Act. See "The Exchange Offer --
Consequences of Exchanging Old Notes."
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT
The Company has significant indebtedness. As of December 31, 1997, on a pro
forma basis after giving effect to the Recapitalization, the Company would have
had $112.2 million of senior indebtedness outstanding, which includes $12.2
million of secured indebtedness and excludes unused and available commitments of
$18.5 million under the Revolving Credit Facility. See "Capitalization." The
Company may incur additional indebtedness in the future, including senior
indebtedness, subject to limitations imposed by the Indenture and the Revolving
Credit Facility.
The level of the Company's indebtedness could have important consequences
to the holders of the Notes, including, but not limited to, the following: (i) a
substantial portion of the Company's cash flow from operations must be dedicated
to debt service and will not be available for other purposes; (ii) the Company's
ability to obtain additional debt financing in the future for working capital,
capital expenditures or acquisitions may be limited; and (iii) the Company's
level of indebtedness could limit its flexibility in reacting to changes in the
industry and economic conditions. Certain of the Company's competitors may
currently operate on a less leveraged basis and therefore could have
significantly greater operating and financing flexibility than the Company.
The Offering and other borrowings made as part of the Recapitalization
resulted in a significant increase in the Company's interest expense. The
Company's ability to make cash payments with respect to the Notes and to satisfy
or refinance its other debt obligations will depend upon its future operating
performance. The Company believes, based on current circumstances, that its cash
flow, together with available borrowings under the Revolving Credit Facility,
will be sufficient to permit it to service its debt requirements as they become
due for the foreseeable future. This belief assumes, among other things, that
the Company will succeed in implementing its business strategy and that there
will be no material adverse developments in the business, liquidity or capital
requirements of the Company. However, if the Company is unable to generate
sufficient cash flow from operations, it will be forced to adopt an alternate
strategy that may include actions such as reducing or delaying acquisitions and
capital expenditures, selling assets, restructuring or refinancing its
indebtedness, including the Notes, or seeking additional equity capital. There
can be no assurance that any of these strategies could be effected on
satisfactory terms, if at all. If the Company is unable to repay its debt,
including the Notes, at maturity, it may have to obtain alternative financing.
If it is unable to do so, the purchasers of the Notes could lose some or all of
their investment. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
15
<PAGE> 17
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
The Indenture restricts, among other things, the Company's ability to:
incur additional indebtedness; pay dividends or make certain other restricted
payments; create certain liens; use proceeds from sales of assets and subsidiary
stock; and enter into certain sale and leaseback transactions and transactions
with affiliates. If the Company fails to comply with these covenants, it would
be in default under the Indenture and the principal and accrued interest on the
Notes would become due and payable. In addition, the Revolving Credit Facility
contains other and more restrictive covenants and prohibits the Company from
prepaying its indebtedness (including the Notes). The Revolving Credit Facility
also requires the Company to maintain specified financial ratios and satisfy
certain financial condition tests. The Company's ability to meet those financial
ratios and tests may be affected by events beyond its control and there can be
no assurance that the Company will meet those ratios and tests. A breach of any
of these covenants could result in a default under the Revolving Credit Facility
and/or the Indenture. If an event of default should occur under the Revolving
Credit Facility, the lenders can elect to declare all amounts of principal
outstanding under the Revolving Credit Facility, together with all accrued
interest, to be immediately due and payable. If the Company were unable to repay
those amounts, the lenders could proceed against the collateral granted to them
to secure that indebtedness. If the Revolving Credit Facility indebtedness were
to be accelerated, there can be no assurance that the assets of the Company
would be sufficient to repay in full that indebtedness and the other
indebtedness of the Company, including the Notes. Substantially all of the
assets of the Company are pledged as security under the Revolving Credit
Facility. See "Description of the Notes" and "Description of the Revolving
Credit Facility."
LIMITATIONS ON REPURCHASE OF NOTES UPON CHANGE OF CONTROL
Upon a Change of Control, each holder of Notes will have certain rights to
require the Company to repurchase all or a portion of such holder's Notes. See
"Description of the Notes." If a Change of Control were to occur, there can be
no assurance that the Company would have sufficient funds to pay the repurchase
price for all Notes tendered by the holders thereof and such failure would
result in an event of default under the Indenture. In addition, a Change of
Control would constitute a default under the Revolving Credit Facility and is
otherwise restricted by the Revolving Credit Facility and may be prohibited or
limited by, or create an event of default under, the terms of other agreements
relating to borrowings which the Company may enter into from time to time,
including other agreements relating to secured indebtedness. If the Company's
obligations under the Revolving Credit Facility or any other secured
indebtedness of the Company were accelerated due to a default thereunder, the
lenders thereunder would have a priority claim on the proceeds from the sale of
the collateral securing such Indebtedness.
UNCERTAINTIES AS TO HEALTH CARE REFORM; REIMBURSEMENT OF MEDICAL EQUIPMENT COSTS
There are widespread efforts to control health care costs in the United
States and abroad. As an example, the Balanced Budget Act of 1997 significantly
reduces the growth in federal spending on Medicare and Medicaid over the next
five years by reducing annual payment updates to hospitals, changing payment
systems for both skilled nursing facilities and home health care services from
cost-based to prospective payment systems, eliminating annual payment updates
for durable medical equipment, and allowing states greater flexibility in
controlling Medicaid costs at the state level. Until the Health Care Financing
Administration (the "HCFA") issues regulations implementing this legislation in
1998, the Company cannot reliably predict the timing of or the exact effect
which these initiatives could have on the pricing and profitability of, or
demand for, the Company's products. The Company also believes it is likely that
the efforts by governmental and private payors to contain costs through managed
care and other efforts and to reform health systems will continue in the future.
There can be no assurance that current or future initiatives will not have a
material adverse effect on the Company's business, financial condition or
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Industry Assessment," and
"Business -- Third Party Reimbursement."
Substantially all of the payments to the Company are received directly from
health care providers, rather than from private insurers, other third party
payors or governmental entities. Under current reimbursement
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<PAGE> 18
regulations, the Company is prohibited from billing the insurer or the patient
directly for services provided for hospital inpatients or outpatients. Payment
to health care providers by third party payors for the Company's services
depends substantially upon such payors' reimbursement policies. Consequently,
those policies have a direct effect on health care providers' ability to pay for
the Company's services and an indirect effect on the Company's level of charges.
Ongoing concerns about rising health care costs may cause more restrictive
reimbursement policies to be implemented in the future. Restrictions on
reimbursements to health care providers may affect such providers' ability to
pay for the services offered by the Company and could indirectly have a material
adverse effect on the Company's business, financial condition or results of
operations. See "Business -- Third Party Reimbursement."
GENERAL ABSENCE OF FORMALIZED AGREEMENTS WITH CUSTOMERS
The Company's Pay-Per-Use program offers customers a flexible approach to
obtaining movable medical equipment. The Company's customers are generally not
obligated to rent the Company's equipment under formalized agreements requiring
long-term commitments or otherwise fixing the rights and obligations of the
parties regarding matters such as billing, liability, warranty or use.
Therefore, the Company faces risks such as fluctuations in usage, inaccurate or
false reporting of usage by customers and disputes over liabilities related to
equipment use. See "Business -- Equipment Management Programs."
MEDICAL EQUIPMENT LIABILITY
Although the Company does not manufacture any medical equipment, the
Company's business entails the risk of claims related to the medical equipment
that it rents and services. The Company has not suffered a material loss due to
a claim. However, any such claims, if made, could have a material adverse effect
on the Company's business, financial condition or results of operations.
Although the Company believes that its current insurance coverage is adequate,
there can be no assurance that claims exceeding such coverage will not be made
or that the Company will be able to continue to obtain liability insurance at
acceptable levels of cost and coverage. See "Business -- Liability and
Insurance."
COMPETITION
The Company believes that the strongest competition to its programs is the
purchase alternative for obtaining movable medical equipment. Currently, many
health care providers view rental primarily as a means of meeting short-term or
peak supplemental needs, rather than as a long term alternative to purchase.
Although the Company believes that it is able to demonstrate the
cost-effectiveness of renting medical equipment on a long term basis, the
Company believes that many health care providers will continue to purchase a
substantial portion of their movable medical equipment. Additionally, in a
number of its geographic and product markets, the Company competes with one
principal competitor and various smaller equipment rental companies that may
compete primarily on the basis of price and who may be able to offer certain
customers lower prices depending on utilization levels and other factors. See
"Business -- Competition."
RELATIONSHIPS WITH KEY SUPPLIERS
The Company purchased its movable medical equipment from over 50 suppliers
and its related disposable medical supplies from over 55 suppliers in 1997. The
Company's five largest suppliers of movable medical equipment, which supplied
approximately 70% of the Company's direct movable medical equipment purchases
for 1997 are: Nellcor Puritan Bennett Inc., Alaris Medical Systems Inc., The
Kendall Company, Abbott Laboratories, Inc. and Baxter Healthcare Corporation.
Adverse developments concerning key suppliers or the Company's relationships
with them could have a material adverse effect on the Company's business,
financial condition or results of operations. See "Business -- Operations" and
"-- Sales of Disposable Products."
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FRAUDULENT CONVEYANCE RISKS
The obligations of the Company under the Notes may be subject to review
under relevant federal and state fraudulent conveyance laws if a bankruptcy case
or a lawsuit (including in circumstances where bankruptcy is not involved) is
commenced by or on behalf of any unpaid creditor of the Company or a
representative of the Company's creditors. If a court in such a lawsuit were to
find that, at the time the Company issued the Notes, the Company (i) intended to
hinder, delay or defraud any existing or future creditor or contemplated
insolvency with a design to prefer one or more creditors to the exclusion in
whole or in part of others or (ii) did not receive fair consideration or
reasonably equivalent value for issuing such Notes and the Company (a) was
insolvent; (b) was rendered insolvent by reason of such incurrence; (c) was
engaged in a business or transaction for which the assets remaining with the
Company constituted unreasonably small capital; or (d) intended to incur, or
believed that it would incur, debts beyond its ability to pay such debts as they
matured, such court could avoid the Company's obligations thereunder, and direct
the return of any amounts paid thereunder to the Company or to a fund for the
benefit of its creditors. Alternatively, in such event, claims of the holders of
such Notes could be subordinated to claims of the other creditors of the
Company.
The measure of insolvency used by a court will vary depending upon the law
of the jurisdiction being applied. Generally, however, a company will be
considered insolvent for these purposes if at the time it incurs indebtedness,
either (i) the fair market value (or fair salable value) of its assets is less
than the amount required to pay its total existing debts and liabilities
(including the probable liability on contingent liabilities) as they become
absolute and matured or (ii) it is incurring debts beyond its ability to pay as
such debts become due.
The Company believes that it will receive fair consideration and reasonably
equivalent value for the Notes and that at the time of, and after giving effect
to, the incurrence of the indebtedness and obligations evidenced by the Notes,
the Company (i) will (A) neither be insolvent nor rendered insolvent thereby,
(B) have sufficient capital to operate its business effectively and (C) be
incurring debts within its ability to pay or refinance as the same mature or
become due and (ii) will have sufficient resources to satisfy any probable money
judgment against it in any pending action. In reaching the foregoing
conclusions, the Company has relied upon its analysis of internal cash flow
projections and estimated values of assets and liabilities of the Company. There
can be no assurance, however, that such analysis will prove to be correct or
that a court passing on such questions would reach the same conclusions.
Additionally, under federal bankruptcy or applicable state insolvency law,
if certain bankruptcy or insolvency proceedings are initiated by or against the
Company within 90 days (or a longer period if the holder of the Notes was deemed
to be an "insider") after any payment by the Company with respect to the Notes
or if the Company anticipated becoming insolvent at the time of such payment,
all or a portion of such payment could be avoided as a preferential transfer and
the recipient of such payment could be required to return such payment.
DEPENDENCE ON KEY PERSONNEL
The Company's business is managed by a number of key personnel, the loss of
whom could have a material adverse effect on the Company's business, financial
condition or results of operations. In addition, the Company believes that its
future success will depend greatly on its continued ability to attract and
retain highly skilled and qualified personnel. The Company has entered into
employment agreements with David E. Dovenberg, Gerald L. Brandt, Robert H.
Braun, Randy C. Engen, Michael R. Johnson and Gary L. Preston. See
"Management -- Employment Agreements." However, there can be no assurance that
key personnel will continue to be employed by the Company after the expiration
of such employment agreements or that the Company will be able to attract and
retain qualified personnel in the future. Failure by the Company to attract or
retain such personnel could have a material adverse effect on the Company's
business, financial condition or results of operations.
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<PAGE> 20
DEPENDENCE ON SALES REPRESENTATIVES AND SERVICE SPECIALISTS
The Company believes that to be successful it must continue to hire, train
and retain highly qualified sales representatives and service specialists. The
Company's sales growth has been supported by hiring and developing new sales
representatives and adding, through acquisitions, established sales
representatives whose existing customers generally have become customers of the
Company. Due to the relationships developed between the Company's sales
representatives and its customers, upon the departure of a sales representative
the Company faces the risk of losing the representative's customers, especially
if the representative were to act as a representative of one of the Company's
competitors. In addition, there has been, and the Company expects that there
will continue to be, intense competition in its industry for divisional managers
and experienced sales representatives. There can be no assurance that the
Company will be able to retain or attract qualified personnel in the future.
Failure by the Company to attract or retain such personnel could have a material
adverse effect on the Company's business, financial condition or results of
operations. From February 10, 1997 through September 22, 1997, the Company
experienced a gradual loss of employees as a result of uncertainties regarding
district office closures and administrative consolidation in connection with the
MEDIQ Transaction. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- MEDIQ Transaction."
EFFECTIVE SUBORDINATION OF THE NOTES
The Old Notes are, and the New Notes will be, general unsecured obligations
of the Company that are effectively subordinated to all secured indebtedness of
the Company to the extent of the value of the assets securing such indebtedness.
As of December 31, 1997, on a pro forma basis after giving effect to the
Recapitalization, the Company would have had $12.2 million of secured
indebtedness, excluding unused and available commitments of $18.5 million under
the Revolving Credit Facility. Borrowings under the Revolving Credit Facility
will be secured by substantially all of the assets of the Company. The Indenture
limits, but does not prohibit, the ability of the Company to incur additional
secured indebtedness.
CONTROL BY INVESTORS
The Company is controlled by Childs, which, with its affiliates,
beneficially owns shares representing approximately 80% of the fully diluted
common equity in the Company. Accordingly, Childs and its affiliates have the
power to elect the Company's board of directors, appoint new management and
cause the approval of any action requiring the approval of the holders of the
Common Stock, including adopting amendments to the Company's Articles of
Incorporation and approving mergers or sales of substantially all of the
Company's assets. The directors elected by Childs have the authority to make
decisions affecting the capital structure of the Company, including the issuance
of additional indebtedness and the declaration of dividends.
LACK OF ESTABLISHED MARKET FOR THE NOTES
The New Notes are being offered to the holders of the Old Notes. The Old
Notes were issued on February 25, 1998 to a small number of institutional
investors and institutional accredited investors and are eligible for trading in
the Private Offering, Resale and Trading through Automated Linkages ("PORTAL")
Market, the National Association of Securities Dealers' screenbased, automated
market for trading of securities eligible for resale under Rule 144A. To the
extent that Old Notes are tendered and accepted in the Exchange Offer, the
trading market for the remaining untendered Old Notes could be adversely
affected. Prior to the Exchange Offer there has been no established trading
market for the Old Notes or the New Notes. Although the Initial Purchaser has
informed the Company that it currently intends to make a market in the New
Notes, it is not obligated to do so and any such market making may be
discontinued at any time without notice. Accordingly, there can be no assurance
regarding the future development of an active market for the New Notes, or the
ability of holders of the New Notes to sell their New Notes or the price at
which such holders may be able to sell their New Notes. The Company does not
intend to apply for listing or quotation of the New Notes on any securities
exchange or stock market. To the extent that a market for the New Notes does
develop, the New Notes could trade at a discount from their principal amount.
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<PAGE> 21
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements and information
relating to the Company that are based on the beliefs of management as well as
assumptions made by, and information currently available to, management and
which involve risks and uncertainties. The Company's actual results may differ
materially with those discussed in such forward-looking statements. Such
forward-looking statements are principally contained in the sections "Prospectus
Summary," "Business -- Company Strengths," "Business -- Growth Strategy,"
"Business -- Operations," "Business -- Competition" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and include,
without limitation, the Company's expectations and estimates as to development
of its services and programs and expansion of its customer base and into new
markets, future financial performance, including growth in revenues and earnings
and the effect on the Company's finances of new strategic alliances and
strategic acquisitions, cash flows from operations, positive impact upon results
and operations of the Recapitalization and related change in management, capital
expenditures, the availability of funds from credit facilities, the sale of
securities, and the cost and timely implementation of the Company's Year 2000
compliance modifications. In addition, in those and other portions of this
Prospectus, the words "believes," "does not believe," "no reason to believe,"
"expects," "plans," "intends," "estimates," "anticipated" or "anticipates" and
similar expressions, as they relate to the Company or the Company's management,
are intended to identify forward-looking statements. Such statements reflect the
current views of the Company with respect to future events and are subject to
certain risks, uncertainties and assumptions, including the risk factors
described in this Prospectus. The following factors, among others, could cause
the Company's actual results to differ materially from those expressed in any
forward-looking statements made by the Company: (i) adverse regulatory
developments affecting, among other things, the ability of the Company's
customers to obtain reimbursement of payments made to the Company; (ii) changes
and trends in customer preferences, including increased purchasing of movable
medical equipment; (iii) difficulties or delays in the Company's continued
expansion into certain markets and development of new markets; (iv)
unanticipated costs or difficulties or delays in implementing the components of
the Company's strategy and plan; (v) loss of or restrictions imposed by, a
significant supplier; (vi) availability, terms and deployment of capital,
including the ability to service or refinance indebtedness; (vii) effects of and
changes in economic conditions, including inflation and monetary conditions;
(viii) actions by competitors; (ix) availability and ability to retain qualified
personnel; and (x) unanticipated costs or difficulties or delays in implementing
the Company's Year 2000 compliance modifications. See "Risk Factors." The
Company assumes no responsibility to update forward-looking information
contained herein.
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THE RECAPITALIZATION
The Recapitalization was effected through the Merger. In connection with
the Recapitalization: (i) The Company's existing shareholders (other than the
Management Investors) received, in consideration for the cancellation of
approximately 5.3 million shares of Common Stock and options to purchase
approximately 344,000 shares of Common Stock, cash in the aggregate amount of
approximately $84.7 million (net of aggregate option exercise price); (ii) the
Company repaid outstanding borrowings of approximately $35.5 million ($33.3
million as of December 31, 1997 on a pro forma basis) under existing loan
agreements; (iii) the Company paid estimated fees and expenses of $11.5 million
related to the Recapitalization; and (iv) the Company paid approximately $3.3
million in severance payments to certain non-continuing members of management.
In order to finance the Recapitalization, the Company: (i) received an equity
contribution of approximately $21.3 million in cash from Childs and affiliates
and the Management Investors; (ii) issued $100.0 million in aggregate principal
amount of Old Notes in the Offering; and (iii) borrowed approximately $14.3
million ($11.5 million as of December 31, 1997 on a pro forma basis) under the
Revolving Credit Facility. In addition, the Management Investors retained their
existing shares of capital stock and options which have a total value of $3.7
million based upon the Merger Consideration and represent, together with new
investments by such persons, approximately 20% of the capital stock of the
Company on a pro forma, fully diluted basis. Following the Recapitalization,
Childs and affiliates and the Management Investors hold securities representing
approximately 80% and 20%, respectively, of the outstanding voting stock of the
Company on a fully diluted basis. See "Management" and "Principal Shareholders."
The Merger was effected pursuant to the Merger Agreement which provided
that, subject to approval by the shareholders of the Company and the receipt of
financing and the satisfaction or waiver of the other conditions to the Merger,
(i) Merger Sub would be merged with and into the Company, with the Company as
the surviving corporation, and (ii) each outstanding share of Common Stock
(other than shares owned directly or indirectly by Childs or the Company, shares
in respect of which appraisal rights are properly exercised and shares held by
the Management Investors), together with certain associated shareholders'
rights, would be converted into the right to receive the Merger Consideration.
As of the effective time of the Recapitalization, the shares of the Common Stock
were no longer quoted on The Nasdaq Stock Market, and the registration of the
Common Stock under the Exchange Act was terminated.
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THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
The Old Notes were sold by the Company on February 25, 1998 to the Initial
Purchaser pursuant to a Purchase Agreement, dated February 23, 1998, entered
into by and among the Company and the Initial Purchaser. Upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal (which together constitute the Exchange Offer), the
Company will accept for exchange Old Notes which are properly tendered on or
prior to the Expiration Date and not withdrawn as permitted below. As used
herein, the term "Expiration Date" means 5:00 p.m., New York City time, on
, 1998; provided, however, that if the Company in its sole
discretion, has extended the period of time for which the Exchange Offer is
open, the term "Expiration Date" means the latest time and date to which the
Exchange Offer is extended.
As of the date of this Prospectus, $100,000,000 aggregate principal amount
of the Old Notes was outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about , 1998, to all holders
of Old Notes known to the Company. The Company's obligation to accept Old Notes
for exchange pursuant to the Exchange Offer is subject to certain conditions as
set forth below under "-- Certain Conditions to the Exchange Offer. "
The Company expressly reserves the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance for exchange of any Old Notes, by giving oral or
written notice of such extension to the holders thereof as described below.
During any such extension, all Old Notes previously tendered will remain subject
to the Exchange Offer and may be accepted for exchange by the Company. Any Old
Notes not accepted for exchange for any reason will be returned without expense
to the tendering holder thereof as promptly as practicable after the expiration
or termination of the Exchange Offer.
Old Notes tendered in the Exchange Offer must be in denominations of
principal amount of $1,000 and any integral multiple thereof.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Notes not therefore accepted for
exchange, upon the occurrence of any of the events specified below under
"-- Certain Conditions to the Exchange Offer." The Company will give oral or
written notice of any extension, amendment, non-acceptance or termination to the
holders of the Old Notes as promptly as practicable, such notice in the case of
any extension to be issued by means of a press release or other public
announcement no later than 9:00 a.m., New York City time, on the next business
day after the previously scheduled Expiration Date.
PROCEDURES FOR TENDERING OLD NOTES
The tender to the Company of Old Notes by a holder thereof as set forth
below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal. Except as set forth below, a holder who wishes to tender
Old Notes for exchange pursuant to the Exchange Offer must transmit either (i) a
properly completed and duly executed Letter of Transmittal, including all other
documents required by such Letter of Transmittal, to First Trust National
Association, as Exchange Agent, at the address set forth below under
"-- Exchange Agent" on or prior to the Expiration Date, or (ii) if such Old
Notes are tendered pursuant to the procedures for book-entry transfer set forth
below, a holder tendering Old Notes may transmit an Agent's Message (as defined
herein) to the Exchange Agent in lieu of the Letter of Transmittal on or prior
to the Expiration Date. In addition, either (i) certificates for such Old Notes
must be received by the Exchange Agent along with the Letter of Transmittal,
(ii) a timely confirmation of a book-entry transfer (a "Book-Entry
Confirmation") of such Old Notes, if such procedure is available, into the
Exchange Agent's account at The Depository Trust Company (the "Book-Entry
Transfer Facility") pursuant to the procedure for book-entry transfer described
below, along with the Letter of Transmittal or an Agent's Message, as the case
may be, must be received by the Exchange Agent prior to the
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Expiration Date, or (iii) the holder must comply with the guaranteed delivery
procedures described below. The term "Agent's Message" means a message,
transmitted to the Book-Entry Transfer Facility and received by the Exchange
Agent and forming a part of the Book-Entry Confirmation, which states that the
Book-Entry Transfer Facility has received an express acknowledgment from the
tendering Participant (as defined herein) that such Participant has received and
agrees to be bound by the Letter of Transmittal and the Company may enforce the
Letter of Transmittal against such Participant.
THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL OR AGENT'S
MESSAGE AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE
HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL,
PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF
TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant thereto are tendered (i) by a registered holder of the Old Notes who
has not completed the box entitled "Special Issuance Instructions" or "Special
Delivery Instructions" on the Letter of Transmittal or (ii) for the account of
an Eligible Institution (as defined herein). In the event that signatures on a
Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantees must be by a firm which is a member
of a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc. or by a commercial bank or trust company
having an office or correspondent in the United States (collectively, "Eligible
Institutions"). If Old Notes are registered in the name of a person other than a
signer of the Letter of Transmittal, the Old Notes surrendered for exchange must
be endorsed by, or be accompanied by a written instrument or instruments of
transfer or exchange, in satisfactory form as determined by the Company in its
sole discretion, duly executed by, the registered Holder with the signature
thereon guaranteed by an Eligible Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined by
the Company in its sole discretion, which determination shall be final and
binding. The Company reserves the absolute right to reject any and all tenders
of any particular Old Notes not properly tendered or to not accept any
particular Old Notes which acceptance might, in the judgment of the Company or
its counsel, be unlawful. The Company also reserves the absolute right to waive
any defects or irregularities or conditions of the Exchange Offer as to any
particular Old Notes either before or after the Expiration Date (including the
right to waive the ineligibility of any holder who seeks to tender Old Notes in
the Exchange Offer). The interpretation of the terms and conditions of the
Exchange Offer as to any particular Old Notes either before or after the
Expiration Date (including the Letter of Transmittal and the instructions
thereto) by the Company shall be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of Old Notes
for exchange must be cured within such reasonable period of time as the Company
shall determine. Neither the Company, the Exchange Agent nor any other person
shall be under any duty to give notification of any defect or irregularity with
respect to any tender of Old Notes for exchange, nor shall any of them incur any
liability for failure to give such notification.
If the Letter of Transmittal is signed by a person or persons other than
the registered holder or holders of Old Notes, such Old Notes must be endorsed
or accompanied by appropriate powers of attorney, in either case signed exactly
as the name or names of the registered holder or holders that appear on the Old
Notes.
If the Letter of Transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Company, proper evidence satisfactory to the Company of their authority to
so act must be submitted.
By tendering, each holder will represent to the Company that, among other
things, the New Notes acquired pursuant to the Exchange Offer are being obtained
in the ordinary course of business of the person receiving such New Notes,
whether or not such person is the holder, and that neither the holder nor such
other person has any arrangement or understanding with any person to participate
in the distribution of the New
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Notes. In the case of a holder that is not a broker-dealer, each such holder, by
tendering, will also represent to the Company that such holder is not engaged
in, or intends to engage in, a distribution of the New Notes. If any holder or
any such other person is an "affiliate," as defined under Rule 405 of the
Securities Act, of the Company, or is engaged in or intends to engage in or has
an arrangement or understanding with any person to participate in a distribution
of such New Notes to be acquired pursuant to the Exchange Offer, such holder or
any such other person (i) could not rely on the applicable interpretations of
the staff of the Commission and (ii) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction. Each broker-dealer that receives New Notes for its own
account in exchange for Old Notes, where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. See "Plan of Distribution." The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the New Notes promptly after acceptance of the
Old Notes. See "-- Certain Conditions to the Exchange Offer." For purposes of
the Exchange Offer, the Company shall be deemed to have accepted properly
tendered Old Notes for exchange when, as and if the Company has given oral or
written notice thereof to the Exchange Agent, with written confirmation of any
oral notice to be given promptly thereafter.
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount at maturity equal to that of the
surrendered Old Note. Interest on the New Notes will accrue from February 25,
1998, the date of original issuance of the Old Notes. If the Exchange Offer is
not consummated by September 23, 1998, the interest rate on the Old Notes from
and including such date until but excluding the date of consummation of the
Exchange Offer will increase by 0.5%. Payments of such interest, if any, on Old
Notes in exchange for which the New Notes were issued will be made to the
persons who, at the close of business on March 1 or September 1 next preceding
the interest payment date, are registered holders of such Old Notes if such
record date occurs prior to such exchange, or are registered holders of the New
Notes if such record date occurs on or after the date of such exchange, even if
Notes are cancelled after the record date and on or before the interest payment
date.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely Book-Entry
Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal and all other required documents or, in the case of a Book-Entry
Confirmation, an Agent's Message in lieu thereof. If any tendered Old Notes are
not accepted for any reason set forth in the terms and conditions of the
Exchange Offer or if Old Notes are submitted for a greater principal amount than
the holder desired to exchange, such unaccepted or non-exchanged Old Notes will
be returned without expense to the tendering holder thereof (or, in the case of
Old Notes tendered by book-entry transfer into the Exchange Agent's account at
the Book-Entry Transfer Facility pursuant to the book-entry procedures described
below, such non-exchanged Old Notes will be credited to an account maintained
with such Book-Entry Transfer Facility) as promptly as practicable after the
expiration or termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected
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through book-entry transfer at the Book-Entry Transfer Facility, the Letter of
Transmittal or facsimile thereof, with any required signature guarantees, or an
Agent's Message in lieu of a Letter of Transmittal, and any other required
documents, must, in any case, be transmitted to and received by the Exchange
Agent at one of the addresses set forth below under "-- Exchange Agent" on or
prior to the Expiration Date or the guaranteed delivery procedures described
below must be complied with.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Notes desires to tender such Old Notes
and the Old Notes are not immediately available, or time will not permit such
holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is made
through an Eligible Institution, (ii) prior to the Expiration Date, the Exchange
Agent received from such Eligible Institution a properly completed and duly
executed Letter of Transmittal (or a facsimile thereof) and Notice of Guaranteed
Delivery, substantially in the form provided by the Company (by telegram, telex,
facsimile transmission, mail or hand delivery), setting forth the name and
address of the holder of Old Notes and the amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that within three New
York Stock Exchange ("NYSE") trading days after the date of execution of the
Notice of Guaranteed Delivery, the certificates for all physically tendered Old
Notes, in proper form for transfer, or a Book-Entry Confirmation, as the case
may be, and any other documents required by the Letter of Transmittal will be
deposited by the Eligible Institution with the Exchange Agent and (iii) the
certificates for all physically tendered Old Notes, in proper form for transfer,
or a Book-Entry Confirmation, as the case may be, and all other documents
required by the Letter of Transmittal, are received by the Exchange Agent within
three NYSE trading days after the date of execution of the Notice of Guaranteed
Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to the Expiration
Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under "--
Exchange Agent." Any such notice of withdrawal must specify the name of the
person having tendered the Old Notes to be withdrawn, identify the Old Notes to
be withdrawn (including the principal amount of such Old Notes), and (where
certificates for Old Notes have been transmitted) specify the name in which such
Old Notes are registered, if different from that of the withdrawing holder. If
certificates for Old Notes have been delivered or otherwise identified to the
Exchange Agent, then, prior to the release of such certificates the withdrawing
holder must also submit the serial numbers of the particular certificates to be
withdrawn and signed notice of withdrawal with signatures guaranteed by an
Eligible Institution unless such holder is an Eligible Institution. If Old Notes
have been tendered pursuant to the procedure for book-entry transfer described
above, any notice of withdrawal must specify the name and number of the account
at the Book-Entry Transfer Facility to be credited with the withdrawn Old Notes
and otherwise comply with the procedures of such facility. All questions as to
the validity, form and eligibility (including time of receipt) of such notices
will be determined by the Company, whose determination shall be final and
binding on all parties. Any Old Notes so withdrawn will be deemed not to have
been validly tendered for exchange for purposes of the Exchange Offer. Any Old
Notes which have been tendered for exchange but which are not exchanged for any
reason will be returned to the holder thereof without cost to such holder (or,
in the case of Old Notes tendered by book-entry transfer into the Exchange
Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry
transfer procedures described above, such Old Notes will be credited to an
account maintained with such Book-Entry Transfer Facility for the Old Notes) as
soon as practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Old Notes may be retendered by following one
of the procedures described under "-- Procedures for Tendering Old Notes" above
at any time on or prior to the Expiration Date.
25
<PAGE> 27
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company
shall not be required to accept for exchange, or to issue New Notes in exchange
for, any Old Notes and may terminate or amend the Exchange Offer, if at any time
before the acceptance of such Old Notes for exchange or the exchange of the New
Notes for such Old Notes, any of the following events shall occur:
(a) there shall be threatened, instituted or pending any action or
proceeding before, or any injunction, order or decree shall have been
issued by, any court or governmental agency or other governmental
regulatory or administrative agency or commission, (i) seeking to restrain
or prohibit the making or consummation of the Exchange Offer or any other
transaction contemplated by the Exchange Offer, or assessing or seeking any
damages as a result thereof, or (ii) resulting in a material delay in the
ability of the Company to accept for exchange or exchange some or all of
the Old Notes pursuant to the Exchange Offer; or any statute, rule,
regulation, order or injunction shall be sought, proposed, introduced,
enacted, promulgated or deemed applicable to the Exchange Offer or any of
the transactions contemplated by the Exchange Offer by any government or
governmental authority, domestic or foreign, or any action shall have been
taken, proposed or threatened, by any government, governmental authority,
agency or court, domestic or foreign, that in the reasonable judgment of
the Company might directly or indirectly result in any of the consequences
referred to in clauses (i) or (ii) above or, in the reasonable judgment of
the Company, might result in the holders of New Notes having obligations
with respect to resales and transfers of New Notes which are greater than
those described in the interpretation of the Commission referred to on the
cover page of this Prospectus, or would otherwise make it inadvisable to
proceed with the Exchange Offer; or
(b) there shall have occurred (i) any general suspension of or general
limitation on prices for, or trading in, securities on any national
securities exchange or in the over-the-counter market, (ii) any limitation
by any governmental agency or authority which may adversely affect the
ability of the Company to complete the transactions contemplated by the
Exchange Offer, (iii) a declaration of a banking moratorium or any
suspension of payments in respect of banks in the United States or any
limitation by any governmental agency or authority which adversely affects
the extension of credit or (iv) a commencement of a war, armed hostilities
or other similar international calamity directly or indirectly involving
the United States, or, in the case of any of the foregoing existing at the
time of the commencement of the Exchange Offer, a material acceleration or
worsening thereof; or
(c) any change (or any development involving a prospective change)
shall have occurred or be threatened in the business, properties, assets,
liabilities, financial condition, operations, results of operations or
prospects of the Company that, in the reasonable judgment of the Company,
is or may be adverse to the Company, or the Company shall have become aware
of facts that, in the reasonable judgment of the Company, have or may have
adverse significance with respect to the value of the Old Notes or the New
Notes;
which in the reasonable judgment of the Company in any case, and regardless of
the circumstances (including any action by the Company) giving rise to any event
described above, makes it inadvisable to proceed with the Exchange Offer and/or
with such acceptance for exchange or with such exchange.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and from time to time.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes, if
at such time any stop order shall be threatened or in effect with respect to the
Registration Statement of which this Prospectus constitutes a part or the
qualification of the Indentures under the Trust Indenture Act of 1939 (the
"TIA").
26
<PAGE> 28
EXCHANGE AGENT
First Trust National Association has been appointed as the Exchange Agent
for the Exchange Offer. All executed Letters of Transmittal should be directed
to the Exchange Agent at one of the addresses set forth below. Questions and
requests for assistance, requests for additional copies of this Prospectus or of
the Letter of Transmittal and requests for Notices of Guaranteed Delivery should
be directed to the Exchange Agent addressed as follows:
Delivery To: First Trust National Association, Exchange Agent
<TABLE>
<S> <C>
By Mail: By Overnight Courier or Hand:
First Trust National Association First Trust National Association
Corporate Trust 180 East 5th Street
P.O. Box 64485 4th Floor Window
St. Paul, Minnesota 55101-9549 St. Paul, Minnesota 55101
Attention: Specialized Finance
</TABLE>
By Facsimile:
(612) 244-1537
Confirm by Telephone:
(612) 973-5800
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF SUCH LETTER OF TRANSMITTAL.
FEES AND EXPENSES
The Company will not make any payment to brokers, dealers, or others
soliciting acceptances of the Exchange Offer.
The estimated cash expenses to be incurred in connection with the Exchange
Offer will be paid by the Company and are estimated in the aggregate to be
$ .
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to
pay any transfer taxes in connection therewith, except that holders who instruct
the Company to register New Notes in the name of, or request that Old Notes not
tendered or not accepted in the Exchange Offer be returned to, a person other
than the registered tendering holder will be responsible for the payment of any
applicable transfer tax thereon.
CONSEQUENCES OF EXCHANGING OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the provisions in
the Indentures regarding transfer and exchange of the Old Notes and the
restrictions on transfer of such Old Notes as set forth in the legend thereon as
a consequence of the issuance of the Old Notes pursuant to exemptions from, or
in transactions not subject to, the registration requirements of the Securities
Act and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not currently anticipate that
it will register Old Notes under the Securities Act. See "Description of the
Notes -- Registration Rights." Based on interpretations by the staff of the
Commission, as set forth in no-action letters issued to third parties, the
Company believes that New Notes issued pursuant to the Exchange Offer in
exchange for Old Notes may be offered for resale, resold or otherwise
transferred by holders thereof (other than any such holder which is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities
27
<PAGE> 29
Act, provided that such New Notes are acquired in the ordinary course of such
holders' business and such holders have no arrangement or understanding with any
person to participate in the distribution of such New Notes. However, the
Company does not intend to request the Commission to consider, and the
Commission has not considered, the Exchange Offer in the context of a no-action
letter and there can be no assurance that the staff of the Commission would make
a similar determination with respect to the Exchange Offer as in such other
circumstances. Each holder, other than a broker-dealer, must acknowledge that it
is not engaged in, and does not intend to engage in, a distribution of New Notes
and has no arrangement or understanding to participate in a distribution of New
Notes. If any holder is an affiliate of the Company, is engaged in or intends to
engage in or has any arrangement or understanding with respect to the
distribution of the New Notes to be acquired pursuant to the Exchange Offer,
such holder (i) could not rely on the applicable interpretations of the staff of
the Commission and (ii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction. Each broker-dealer that receives New Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. See "Plan of Distribution." In addition, to comply with the
state securities laws, the New Notes may not be offered or sold in any state
unless they have been registered or qualified for sale in such state or an
exemption from registration or qualification is available and is complied with.
The offer and sale of the New Notes to "qualified institutional buyers" (as such
term is defined under Rule 144A of the Securities Act) is generally exempt from
registration or qualification under the state securities laws. The Company
currently does not intend to register or qualify the sale of the New Notes in
any state where an exemption from registration or qualification is required and
not available.
28
<PAGE> 30
USE OF PROCEEDS
The Company will not receive any proceeds from the Exchange Offer. The net
proceeds of the Offering were used to provide a portion of the funds necessary
to consummate the Recapitalization and to pay fees and expenses related thereto.
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Company
as of December 31, 1997 (i) on an actual basis and (ii) on a pro forma basis
after giving effect to the Recapitalization, as if it had occurred on December
31, 1997. This table should be read in conjunction with "The Recapitalization,"
"Description of the Notes," "Description of the Revolving Credit Facility" and
the Financial Statements.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
-----------------------
ACTUAL PRO FORMA
-------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Total debt:
Existing credit facility.................................. $ 9,554 $ --
Revolving Credit Facility(1).............................. -- 11,516
Existing indebtedness..................................... 24,391(2) 641(3)
Notes offered hereby...................................... -- 100,000
------- --------
Total debt............................................. 33,945 112,157
Total shareholders' equity (deficiency)..................... 33,000 (36,889)
------- --------
Total capitalization.............................. $66,945 $ 75,268
======= ========
</TABLE>
- ---------------
(1) As of December 31, 1997, on a pro forma basis after giving effect to the
Recapitalization, the Company would have had availability of $18.5 million
under the Revolving Credit Facility. See "Description of the Revolving
Credit Facility."
(2) Consists of (i) $9.7 million of 8.10% Series A notes; (ii) $7.1 million of
7.47% senior notes; (iii) $4.0 million of 8.29% Series B notes; (iv) $3.0
million of 9.60% senior notes; and (v) capitalized leases of $0.6 million.
(3) Consists of existing capital leases.
29
<PAGE> 31
UNAUDITED PRO FORMA CONDENSED FINANCIAL DATA
The following unaudited pro forma condensed financial data are based on the
historical financial statements of the Company included elsewhere in this
Prospectus, adjusted to give effect to the pro forma adjustments described in
the notes thereto. The unaudited pro forma condensed balance sheet gives effect
to the Recapitalization as though it had occurred on December 31, 1997. The
unaudited pro forma condensed statement of income gives effect to the
Recapitalization as though it had occurred on January 1, 1997.
The pro forma adjustments are based upon available data and certain
assumptions that the Company believes are reasonable. The unaudited pro forma
condensed financial data are not necessarily indicative of the Company's
financial position or results of operations that might have occurred had the
aforementioned transactions been completed as of the dates indicated above and
do not purport to represent what the Company's financial position or results of
operations might be for any future period or date. The unaudited pro forma
condensed financial data should be read in conjunction with the Financial
Statements and the information contained in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this Offering Memorandum.
The transactions are intended to be accounted for as a leveraged
recapitalization, pursuant to which all assets, liabilities and shareholders'
equity of the Company would be carried over at historical cost basis.
30
<PAGE> 32
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.......................... $ 0 (a) $ 0
Accounts receivable, net........................... 11,501 11,501
Inventories........................................ 1,357 1,357
Deferred income taxes.............................. 455 455
Other current assets............................... 1,234 $ 2,297(b) 3,531
------- -------- --------
Total current assets............................ 14,547 2,297 16,844
Property and equipment, net.......................... 51,911 51,911
Intangible assets:
Goodwill, net...................................... 14,309 14,309
Other, net......................................... 419 5,550(c) 5,969
------- -------- --------
Total assets.................................... $81,186 $ 7,847 $ 89,033
======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Current portion of long-term debt.................. $ 211 $ 211
Accounts payable................................... 3,905 3,905
Accrued compensation and pension................... 2,214 2,214
Other accrued expenses............................. 811 811
------- --------
Total current liabilities....................... 7,141 7,141
Deferred compensation and pension.................... 2,201 $ (476)(b) 1,725
Deferred income taxes................................ 5,110 5,110
Long-term debt....................................... 33,734 78,212(d) 111,946
------- -------- --------
Total liabilities............................... 48,186 77,736 125,922
------- -------- --------
Shareholders' equity (deficiency).................... 33,000 (69,889)(b) (36,889)
------- -------- --------
Total liabilities and shareholders' equity
(deficiency).................................. $81,186 $ 7,847 $ 89,033
======= ======== ========
</TABLE>
See accompanying notes to unaudited pro forma condensed balance sheet.
31
<PAGE> 33
NOTES TO UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
(a) Reflects the changes in the Company's cash due to the
Recapitalization:
Gross proceeds from the Offering....................... $100,000
Capital contributions from Childs and Management
Investors (net of non-cash contributions of $2,895 in
common stock retained by Management Investors and $782
of stock options retained by Management Investors).... 21,323
Proceeds from Revolving Credit Facility................ 11,516
Payment for redemption of outstanding common stock and
stock options from existing selling shareholders (net
of option proceeds)................................... (84,735)
Repayment of the Company's outstanding borrowings
(excluding assumed capital leases of $641............. (33,304)
Severance payments to non-continuing management........ (3,300)
Financing costs related to the Recapitalization........ (5,550)
Nonrecurring fees and expenses related to the
Recapitalization...................................... (5,950)
--------
Net change in cash..................................... $ 0
========
(b) Reflects net change in shareholder's equity
(deficiency):
Total fair value of new contributed equity capital..... $ 21,323
Payment with respect to outstanding common stock and
stock options from existing selling shareholders (net
of option proceeds)................................... (84,735)
Severance payments to non-continuing management
excluding $476 already expensed....................... (2,824)
Tax benefit of severance payments to non-continuing
management using a marginal tax rate of 42%........... 1,186
Tax benefit of stock options exercised by existing
selling shareholders (reflects 333,701 stock options
exercised resulting in a tax benefit of $2,645 using a
marginal income tax rate of 42%)...................... 1,111
Nonrecurring fees and expenses related to the
Recapitalization...................................... (5,950)
--------
Net decrease in shareholders' equity (deficiency)...... $(69,889)
========
(c) Reflects financing costs related to the
Recapitalization.......................................... $ 5,550
========
(d) Reflects net change in long-term debt:
Gross proceeds from the Offering....................... $100,000
Proceeds from Revolving Credit Facility................ 11,516
Repayment of the Company's long-term debt (excluding
assumed long term portion of capital leases of
$430)................................................. (33,304)
--------
Net increase in long-term debt......................... $ 78,212
========
</TABLE>
32
<PAGE> 34
UNAUDITED PRO FORMA CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
FOR THE
HISTORICAL RECAPITALIZATION PRO FORMA
---------- ---------------- ---------
<S> <C> <C> <C>
Revenues:
Equipment rentals.................................. $54,489 $54,489
Sales of supplies and equipment, and other......... 5,586 5,586
------- -------
Total revenues.................................. 60,075 60,075
------- -------
Costs and expenses:
Cost of equipment rentals.......................... 13,577 13,577
Rental equipment depreciation...................... 14,435 14,435
Cost of supplies and equipment sales............... 3,838 3,838
------- -------
Total costs of rentals and sales................ 31,850 31,850
------- -------
Gross profit.................................... 28,225 28,225
Selling, general and administrative................ 18,448 $ (986)(a) 17,462
Shareholder value expenses......................... 1,719 (1,719)(b) 0
------- ------- -------
Operating income................................ 8,058 (2,705) 10,763
Interest expense................................... 3,012 9,023(c) 12,035
------- ------- -------
Income (loss) before provision (benefit) for income
taxes.............................................. 5,046 (6,318) (1,272)
------- ------- -------
Provision (benefit) for income taxes................. 2,347 (2,654)(d) (307)
------- ------- -------
Net income (loss)............................... $ 2,699 $(3,664) $ (965)
======= ======= =======
</TABLE>
See accompanying notes to unaudited pro forma condensed statement of income.
33
<PAGE> 35
NOTES TO UNAUDITED PRO FORMA CONDENSED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
(a) In connection with the Recapitalization, seven of the eleven
members of senior management did not continue employment
with the Company after the completion of the transaction.
The Company's former Chief Financial Officer (the current
Chief Executive Officer) and five other senior managers
entered into employment agreements with the Company as part
of the Recapitalization and will comprise the Company's
senior management team at compensation levels that are less
than the compensation level of the members of senior
management prior to the Recapitalization. The adjustment
reflects the resulting decrease in the senior management
team compensation (salary and fringe benefits) of $1,226 for
the year ended December 31, 1997. The pro forma condensed
statement of income does not make any adjustment for accrued
bonuses for all eleven members of senior management totaling
$220 for the year ended December 31, 1997. The adjustment
also reflects Childs Associates annual management fee of
$240 for the year ended December 31, 1997.
(b) Reflects shareholder value expenses, consisting primarily of
legal, investment banking and special committee fees,
incurred by the Company in the process of exploring
strategic alternatives to enhance shareholder value.
(c) Reflects the net change in interest expense as a result of
the Recapitalization:
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Interest expense related to the Notes offered hereby........ $10,250
Interest expense related to the Revolving Credit Facility and capital leases... 973
Elimination of historical interest expense related to debt
retired using the proceeds of the Offering................ (3,012)
Amortization of deferred placement costs incurred in the
Offering, over the 10-year term of the Notes and the
5-year term of the Revolving Credit Facility.............. 693
Commitment fee of 0.5% on unused portion of Revolving Credit
Facility.................................................. 94
Annual administrative agent's fee, related to the Revolving
Credit Facility........................................... 25
-------
Net increase in interest expense............................ $ 9,023
=======
Interest expense and commitment fee related to the Revolving
Credit Facility is determined based on monthly average
borrowings (including seasonal borrowings) of $11,267 for
the year ended December 31, 1997. Interest expense was
calculated using the following rates: (a) Revolving Credit
Facility -- 8.25%, (b) Notes -- 10.25%.
(d) Represents the reduction in income to record the income tax
benefit related to pro forma adjustments, computed using a
marginal income tax rate of 42% for the year ended
December 31, 1997.
</TABLE>
34
<PAGE> 36
SELECTED HISTORICAL FINANCIAL DATA
The selected financial data set forth below (excluding rental equipment
units) for and as of each of the years in the five year period ended December
31, 1997 are derived from the Company's audited financial statements. The
selected financial data presented below are qualified in their entirety by, and
should be read in conjunction with, the financial statements and notes thereto
and other financial and statistical information included elsewhere in this
Offering Memorandum, including the information contained under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
FISCAL YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Equipment rentals....................... $ 36,162 $ 38,980 $ 45,870 $ 50,743 $ 54,489
Sales of supplies and equipment, and
other................................. 9,993 8,309 7,166 6,198 5,586
-------- -------- -------- -------- --------
Total revenues............................ 46,155 47,289 53,036 56,941 60,075
-------- -------- -------- -------- --------
Costs of rentals and sales:
Cost of equipment rentals............... 9,052 10,018 11,841 13,332 13,577
Rental equipment depreciation........... 8,699 9,527 10,800 12,603 14,435
Cost of supplies and equipment sales.... 7,872 6,419 5,352 4,423 3,838
Write-down of DPAP inventories(1)....... -- -- -- 2,213 --
-------- -------- -------- -------- --------
Total costs of rentals and sales.......... 25,623 25,964 27,993 32,571 31,850
-------- -------- -------- -------- --------
Gross profit.............................. 20,532 21,325 25,043 24,370 28,225
Selling, general and administrative....... 15,769 16,561 18,560 19,695 18,448
Shareholder value expenses(2)............. -- -- -- 306 1,719
-------- -------- -------- -------- --------
Operating income.......................... 4,763 4,764 6,483 4,369 8,058
-------- -------- -------- -------- --------
Interest expense.......................... 1,071 1,268 1,784 2,518 3,012
-------- -------- -------- -------- --------
Income before provision for income
taxes................................... 3,692 3,496 4,699 1,851 5,046
-------- -------- -------- -------- --------
Provision for income taxes................ 1,522 1,499 1,949 919 2,347
-------- -------- -------- -------- --------
Net income................................ $ 2,170 $ 1,997 $ 2,750 $ 932 $ 2,699
======== ======== ======== ======== ========
OTHER DATA:
Net cash provided by operating
activities.............................. $ 11,672 $ 11,550 $ 13,071 $ 14,657 $ 20,001
Net cash used in investing activities..... (10,919) (15,534) (19,725) (26,859) (18,026)
Net cash (used in) provided by financing
activities.............................. (753) 3,984 6,654 12,400 (2,172)
EBITDA(3)................................. 14,260 15,160 18,246 18,266 24,129
Adjusted EBITDA(4)........................ 14,260 15,160 18,246 20,785 25,848
Adjusted EBITDA margin(5)................. 30.9% 32.1% 34.4% 36.5% 43.0%
Depreciation and amortization............. $ 9,497 $ 10,396 $ 11,763 $ 13,897 $ 16,071
Capital expenditures...................... $ 11,394 $ 15,921 $ 19,911 $ 15,210 $ 19,144
Ratio of earnings to fixed charges(6)..... 4.4x 3.8x 3.6x 2.7x 3.2x
Rental equipment (units at end of
period)................................. 33,000 38,000 45,000 52,000 56,000
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital(7)........................ $ 5,193 $ 5,354 $ 5,059 $ 8,573 $ 7,617
Total assets.............................. 46,152 53,184 66,849 79,707 81,186
Total debt................................ 13,650 17,135 23,588 37,150 33,945
Shareholders' equity...................... 23,883 26,035 28,712 29,128 33,000
</TABLE>
35
<PAGE> 37
- ---------------
(1) The Company experienced declining sales of Demand Positive Airway Pressure
("DPAP") devices for adult obstructive sleep apnea during 1996. Because
market acceptance of the DPAP devices did not meet expectations, the
Company's assessment resulted in a write-down of $2.2 million in 1996.
(2) Reflects expenses, consisting primarily of legal, investment banking and
special committee fees, incurred by the Company in the process of exploring
strategic alternatives to enhance shareholder value.
(3) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization. Management believes that EBITDA is generally
accepted as providing useful information regarding a company's ability to
service and/or incur debt. However, EBITDA should not be considered in
isolation or as a substitute for net income, cash flows or other income or
cash flow data prepared in accordance with generally accepted accounting
principles or as a measure of a company's profitability or liquidity.
(4) Adjusted EBITDA reflects EBITDA, adjusted to exclude the write-down of DPAP
inventories of $2.2 million for the year ended December 31, 1996, and
shareholder value expenses of $0.3 million and $1.7 million for the years
ended December 31, 1996 and 1997, respectively. Adjusted EBITDA should not
be considered in isolation or as a substitute for net income, cash flows or
other income or cash flow data prepared in accordance with GAAP or as a
measure of a company's profitability or liquidity.
(5) Adjusted EBITDA margin represents the ratio of Adjusted EBITDA to total
revenues.
(6) For the purpose of determining the ratio of earnings to fixed charges,
earnings consist of income before income taxes, fixed charges, write-down of
DPAP inventories and shareholder value expenses. Fixed charges consist of
interest expense, which includes the amortization of deferred debt issuance
costs.
(7) Represents total current assets (excluding cash and cash equivalents) less
total current liabilities, excluding current portion of long-term debt.
36
<PAGE> 38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and
results of operations of the Company should be read in conjunction with the
accompanying Financial Statements and notes thereto appearing elsewhere in this
Prospectus.
GENERAL
The Company is a leading nationwide provider of movable medical equipment
to more than 2,800 hospitals and alternate care providers through its equipment
rental and outsourcing programs.
The following discussion addresses the financial condition of the Company
as of December 31, 1997 and the results of operations and cash flows for the
years ended December 31, 1997, 1996 and 1995. This discussion should be read in
conjunction with the Financial Statements included elsewhere herein.
INDUSTRY ASSESSMENT
The Company's customers, primarily hospitals and alternate care providers,
have been and continue to be faced with cost containment pressures and
uncertainties with respect to health care reform and reimbursement. The Company
believes that market reform is continuing with movement toward managed care,
health care related consolidations and the formation of integrated health care
systems. There is an effort by providers of health care to coordinate all
aspects of patient care irrespective of delivery location. Likely changes in
reimbursement methodology, and a gradual transition toward fixed, per-capita
payment systems and other risk-sharing mechanisms, will reward health care
providers who improve efficiencies and effectively manage their costs, while
providing care in the most appropriate setting. Although future reimbursement
policies remain uncertain and unpredictable, the Company believes that the
recently approved five-year budget and Taxpayer Relief Act of 1997, which will
be financed largely through cuts in the growth of Medicare spending, will
continue to place focus on cost containment in health care.
The Company believes its Pay-Per-Use and other rental programs respond
favorably to the current reform efforts by providing high quality equipment
through programs which help health care providers improve their efficiency while
effectively matching costs to patient needs, wherever that care is being
provided. While the Company's strategic focus appears consistent with health
care providers' efforts to contain costs and improve efficiencies, there can be
no assurances as to how health care reform will ultimately evolve and the impact
it will have on the Company.
Because the capital equipment procurement decisions of health care
providers are significantly influenced by the regulatory and political
environment for health care, historically the Company has experienced certain
adverse operating trends in periods when significant health care reform
initiatives were under consideration and uncertainty remained as to their likely
outcome. To the extent general cost containment pressures on health care
spending and reimbursement reform, or uncertainty as to possible reform, causes
hospitals and alternate care providers to defer the procurement of medical
equipment, reduce their capital expenditures or change significantly their
utilization of medical equipment, there could be a material adverse effect on
the Company's business, financial condition and results of operations.
MEDIQ TRANSACTION
On February 10, 1997, the Company and MEDIQ entered into a definitive
agreement for MEDIQ to acquire the Company for $17.50 per share of Common Stock.
Including the assumption of the Company's debt, the total purchase price would
have been approximately $138.0 million excluding fees and expenses. On September
22, 1997 (the "Termination Date"), the Company and MEDIQ mutually terminated
their agreement (the agreement and its termination, collectively, the "MEDIQ
Transaction"). This termination resulted from the likelihood of a protracted
administrative proceeding before the Federal Trade Commission ("FTC") and the
uncertainty of the outcome and the costs associated with continuing to defend
against the efforts of the FTC to prevent the merger of MEDIQ and the Company on
anti-competitive grounds.
37
<PAGE> 39
From February 10, 1997 through the Termination Date, the Company
experienced a gradual loss of employees as a result of uncertainties regarding
district office closures and administrative consolidation which were discussed
by MEDIQ. In addition, during this period, some potential and existing customers
of the Company deferred entering into new rental agreements while others
terminated rental agreements with the Company, each as a result of uncertainty
regarding the ownership of the Company. The loss of employees and customer
uncertainties discussed above may continue to adversely affect near term rental
revenues. Management believes, however, that the disruption resulting from the
MEDIQ Transaction, has been largely mitigated by: (i) the termination of the
agreement with MEDIQ; (ii) the public announcement of the Recapitalization; and
(iii) the addition of 16 employees from the Termination Date through December
31, 1997.
RESULTS OF OPERATIONS
The following table provides information on the percentages of certain
items of selected financial data to total revenues.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES
-----------------------------
YEARS ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Revenues:
Equipment rentals......................................... 86.5% 89.1% 90.7%
Sales of supplies and equipment, and other................ 13.5 10.9 9.3
----- ----- -----
Total revenues.............................................. 100.0 100.0 100.0
Costs of rentals and sales:
Cost of equipment rentals................................. 22.3 23.4 22.6
Rental equipment depreciation............................. 20.4 22.1 24.0
Cost of supplies and equipment sales...................... 10.1 7.8 6.4
Write-down of DPAP inventories............................ -- 3.9 --
----- ----- -----
Gross profit................................................ 47.2 42.8 47.0
----- ----- -----
Selling, general and administrative......................... 35.0 34.6 30.7
Shareholder value expenses.................................. -- 0.6 2.9
Interest expense............................................ 3.3 4.4 5.0
----- ----- -----
Income before provision for income taxes.................... 8.9 3.2 8.4
----- ----- -----
Provision for income taxes.................................. 3.7 1.6 3.9
----- ----- -----
Net income.................................................. 5.2% 1.6% 4.5%
===== ===== =====
</TABLE>
1997 COMPARED TO 1996
Equipment Rental Revenues. Equipment rental revenues were $54.5 million in
1997, representing a $3.7 million, or 7.4%, increase from equipment rental
revenues of $50.7 million in 1996. This increase resulted primarily from the
acquisition of BERS, completed on August 13, 1996, which contributed
approximately $2.4 million to the increase in rental revenues in the first six
months of 1997. BERS' offices in Baltimore, Richmond, and Charlotte were
integrated into the corresponding Company offices early in the third quarter of
1997 and, consequently, separate 1997 third and fourth quarter revenue data for
BERS is not available. Excluding revenue from BERS, the increase in equipment
rental revenues resulted from continued growth from hospitals and alternate care
customers, as well as from newer offices. This growth was accomplished despite
the continuing gradual decline in hospital census rates and the increase in
consolidations in the health care industry. The Company expects equipment rental
revenues generated from the alternate care market to continue to increase,
reflecting the trend toward treating the patient in the most cost effective
environment.
Effective February 1, 1997, the Company entered into a two year agreement
with Premier, one of the nation's largest health care alliance enterprises, for
medical equipment rentals and services. This agreement is expected to produce
significant savings for Premier's 1,750 hospitals and health system owners and
affiliates,
38
<PAGE> 40
as it offers special rates, discounts and incentives on equipment rentals. The
Premier agreement and some longer term commitments the company has established
with some of its larger customers have required some price concessions.
Management believes that these agreements will contribute to future rental
revenue growth, however, incremental revenues for 1997 from Premier's members
were minimal because of the MEDIQ Transaction.
Sales of Supplies and Equipment, and Other. Sales of supplies and
equipment, and other were $5.6 million in 1997, representing a $0.6 million, or
9.9%, decrease from sales of supplies and equipment, and other of $6.2 million
in 1996. This decrease was primarily due to a decline in the sales of the DPAP
devices as the Company decided to abandon the sleep apnea market in December
1996. Sales of supplies and equipment, and other were also adversely impacted by
the continuing trend of a major vendor of disposables to market its products
directly to some of the Company's larger customers. This trend resulted in a
$0.3 million decline in sales in 1997. The Company does not emphasize sales and
offers them to be a full service provider for its customers.
Cost of Equipment Rentals. Cost of equipment rentals were $13.6 million in
1997, representing a $0.3 million, or 1.8%, increase from cost of equipment
rentals of $13.3 million in 1996. Cost of equipment rentals as a percentage of
equipment rental revenues decreased to 24.9% in 1997 from 26.3% in 1996. This
decrease resulted from the Company purchasing a newer generation of a particular
line of equipment. The older generation of this equipment had been rented from
the manufacturer on a short term basis in 1996 due to perceived obsolescence
risk. In addition, the decrease reflected the loss of some rental support staff
as a result of the MEDIQ Transaction.
Rental Equipment Depreciation. Rental equipment depreciation was $14.4
million in 1997, representing a $1.8 million, or 14.5%, increase from rental
equipment depreciation of $12.6 million in 1996. Rental equipment depreciation
as a percentage of equipment rental revenues increased to 26.5% in 1997 from
24.8% in 1996. This increase was the result of the impact of a full year of
depreciation on equipment acquisitions made in 1996 (including higher
depreciation as a percentage of equipment rental revenues from BERS) and the
Company's purchase of equipment that was previously rented as discussed above.
Gross Profit. Total gross profit was $28.2 million in 1997, representing a
$3.8 million, or 15.8%, increase from total gross profit of $24.4 million in
1996. Total gross margin increased to 47.0% of total revenues in 1997 from 42.8%
of total revenues in 1996. Total gross profit in 1996 was reduced by $2.2
million, or 3.9% of total revenues, due to the write-down of DPAP inventories.
Gross profit on rentals represents equipment rental revenues reduced by the cost
of equipment rentals and rental equipment depreciation. Gross margin on
equipment rentals decreased to 48.6% in 1997 from 48.9% in 1996. This decrease
was predominantly due to the previously discussed increase in rental equipment
depreciation as a percentage of equipment rental revenues partially offset by
the previously discussed decrease in cost of equipment rentals as a percentage
of equipment rental revenues.
Gross margin on sales of supplies and equipment, and other (which excludes
the write-down of DPAP inventories) increased to 31.3% in 1997 from 28.6% in
1996. This increase in sales gross margin was due to a vendor selling lower
margin products directly to hospitals, which resulted in a higher margin
percentage on a lower volume of total sales, and the addition of higher margin
BERS sales. See "- 1996 Compared to 1995 - Write-down of DPAP Inventories."
Selling, General and Administrative Expenses. Selling general and
administrative expenses ("SG&A") was $18.4 million in 1997, representing a $1.3
million, or 6.3%, decrease from SG&A of $19.7 million in 1996. SG&A as a
percentage of total revenues decreased to 30.7% in 1997 from 34.6% in 1996. This
decrease was due to the cost savings associated with the Company's expense
control initiatives implemented in late 1996. Additionally, the loss of
employees due to the MEDIQ Transaction reduced SG&A for 1997.
Shareholder Value Expenses. The Company incurred costs of approximately
$1.7 million in 1997, compared to $0.3 million in 1996, reflecting expenses
consisting primarily of legal, investment banking and special committee fees,
incurred by the Company in the process of exploring strategic alternatives to
enhance shareholder value.
39
<PAGE> 41
Adjusted EBITDA. Primarily as a result of factors stated above, Adjusted
EBITDA was $25.8 million in 1997, representing a $5 million, or 24.0%, increase
from Adjusted EBITDA of $20.8 million in 1996. Adjusted EBITDA as a percentage
of total revenues increased to 43.0% in 1997 from 36.5% in 1996. See Note 5 to
"Selected Historical Financial Data."
Interest Expense. Interest expense was $3.0 million in 1997, representing
an increase of $0.5 million, or 19.6%, from interest expense of $2.5 million in
1996. This increase primarily reflects interest on the BERS acquisition debt and
incremental borrowings associated with capital equipment additions. Average
borrowings increased to $34.6 million in 1997 from $30.5 million in 1996.
Income Taxes. The Company's effective income tax rate decreased to 46.5%
in 1997 from 49.6% for 1996. This decrease was primarily due to the effect of
non-deductible expenses on the Company's lower taxable income in 1996.
Bazooka Beds. The Company acquired its equipment pool of Bazooka portable
specialty beds under an exclusive agreement which was terminated by the Company
in March 1996. The Company does not expect to acquire any additional Bazooka
beds and further expects that future purchases of equipment will be in response
to customer driven demand, consistent with the Company's current and historical
strategy. Utilization of Bazooka beds in the Company's pool is currently below
the desired level and declined steadily during 1997. The Company believes the
decline in utilization of Bazooka beds is temporary and that the supply/demand
imbalance will be reduced. The Company has performed an impairment analysis
based upon projected undiscounted cash flows in accordance with the current
accounting literature and has determined that the current book value of these
assets is currently fully recoverable. However, in the event that anticipated
growth in customer demand for this product does not occur, the Company's margin
on these products could be adversely affected. As of December 31, 1997 the net
book value of Bazooka bed inventory was $5.4 million.
1996 COMPARED TO 1995
Equipment Rental Revenues. Equipment rental revenues were $50.7 million in
1996, representing a $4.8 million, or 10.6%, increase from equipment rental
revenues of $45.9 million in 1995. This increase was partially as a result of
the acquisition of BERS which contributed $1.8 million to the 1996 equipment
rental revenue increase. The remaining $3.1 million increase in equipment rental
revenues, representing a 6.8% increase from 1995, resulted from continued growth
from hospitals and established offices, from substantially higher growth rates
in equipment rental revenues from alternate care customers and from newer
offices.
Sales of Supplies and Equipment, and Other. Sales of supplies and
equipment, and other were $6.2 million in 1996, representing a $1.0 million, or
13.5%, decrease from sales of supplies and equipment, and other of $7.2 million
in 1995. This decrease was primarily due to a continued decline in the sales of
the DPAP devices first introduced in February 1995. The Company decided to
abandon the sleep apnea market in December 1996. Sales of DPAP devices were $0.8
million in 1995 and $0.4 million in 1996. See "-- Write-down of DPAP
Inventories." Sales of supplies and equipment, and other were also adversely
impacted by the continuing trend of a major vendor of disposables to market its
products directly to some of the Company's larger customers. The acquisition of
BERS contributed $0.3 million to sales of supplies and equipment, and other in
1996.
Cost of Equipment Rentals. Cost of equipment rentals were $13.3 million in
1996, representing a $1.5 million, or 12.6% increase from costs of equipment
rentals of $11.8 million in 1995. Cost of equipment rentals as a percentage of
equipment rental revenues increased to 26.3% in 1996 from 25.8% for the same
period of 1995. This increase reflected planned expense increases primarily
associated with several new AMP accounts, the opening of six new offices since
January 1, 1995 and the acquisition of BERS.
Rental Equipment Depreciation. Rental equipment depreciation was $12.6
million in 1996, representing a $1.8 million, or 16.7% increase from rental
equipment depreciation of $10.8 million in 1995. Rental equipment depreciation
as a percentage of equipment rental revenues increased to 24.8% in 1996 from
23.5% in 1995. This increase was the result of a full year of depreciation on
equipment acquisitions made in 1995 which were not matched by a growth in
equipment rental revenues as well as depreciation expense on surplus Bazooka
beds.
40
<PAGE> 42
Gross Profit. Total gross profit was $24.4 million in 1996, representing a
$0.7 million, or 2.7% decrease from total gross profit of $25.0 million in 1995.
Total gross margin decreased to 42.8% in 1996 from 47.7% in 1995. These
decreases were primarily due to the write-down of DPAP inventories. Gross margin
on equipment rentals decreased to 44.5% in 1996 from 50.6% in 1995. This
decrease was primarily due to the increase in the cost of equipment rentals and
rental equipment depreciation expenses discussed above.
Gross margin on sales of supplies and equipment, and other improved to
28.6% in 1996 from 25.3% in 1995. This improvement was due to a vendor selling
lower margin products directly to hospitals, which resulted in a higher margin
percentage on lower volume of total sales and, in 1995 due to the impact of
higher margin DPAP sales. See "-- Write-down of DPAP Inventories."
Selling, General and Administrative Expenses. SG&A was $19.7 million in
1996, representing a $1.1 million, or 6.1% increase from SG&A of $18.6 million
in 1995. SG&A as a percentage of total revenues remained substantially the same
at 34.6% in 1996 compared with 35.0% for 1995 as a result of a cut in
performance based incentive and profit sharing expenses, including approximately
$0.8 million related to BERS SG&A and related goodwill amortization.
Expense Control Initiatives. During the second half of 1996, as a result
of slower than anticipated rental revenue growth and lower margins, the Company
instituted expense control initiatives to reduce or defer costs. In August 1996,
the Company announced executive salary cuts, a moratorium on new hires and the
deferral of the opening of the previously announced offices to be located in
Oklahoma City, OK and Nashville, TN. In October 1996, the Company announced the
elimination of 10 corporate positions and the cutting of nonessential activities
and changed the Company's employee medical benefit program from a total
company-paid plan to a shared-cost program, effective January 1, 1997. The
Company expects the cost reduction in 1997 to be approximately $1.0 million for
the full year, beginning in the first quarter of 1997.
Write-down of DPAP Inventories. The Company experienced declining sales of
DPAP devices for adult obstructive sleep apnea during 1996. Because market
acceptance of the DPAP devices did not meet expectations, the Company's
quarterly assessment resulted in a write-down of $1.0 million in the second
quarter of 1996 and a write-down of the $1.2 million remaining carrying value of
DPAP inventories in the fourth quarter of 1996.
Adjusted EBITDA. Primarily as a result of factors stated above, Adjusted
EBITDA was $20.8 million in 1996, representing a $2.5 million, or 13.9% increase
from Adjusted EBITDA of $18.3 million in 1995. Adjusted EBITDA as a percentage
of total revenues increased to 36.5% in 1996 from 34.4% in 1995. See Note 5 to
"Selected Historical Financial Data."
Interest Expense. Interest expense was $2.5 million in 1996, representing
a $0.7 million or 41.1%, increase from interest expense of $1.8 million in 1995.
This increase primarily reflects, in 1996, interest of approximately $0.4
million on the BERS acquisition debt and incremental borrowings associated with
capital equipment additions. Average borrowings, which increased to $30.5
million in 1996 from $21.4 million in 1995, were also affected by the carrying
cost of surplus Bazooka and DPAP inventories.
Income Taxes. The Company's effective tax rate increased to 49.7% in 1996
from 41.5% in 1995. This increase was primarily due to the effect of
non-deductible expenses on the Company's lower taxable income.
Completed BERS Acquisition. On August 13, 1996, the Company completed its
acquisition of BERS pursuant to a stock purchase agreement among the Company and
the shareholders of BERS. As a result of the acquisition, the Company acquired
all of the outstanding capital stock of BERS, and BERS became a wholly-owned
subsidiary of the Company. In connection with the acquisition, the Company paid
approximately $11.0 million to the shareholders of BERS and repaid approximately
$1.7 million of outstanding indebtedness of BERS. BERS results are included in
the financial statements only from the date of acquisition.
41
<PAGE> 43
SELECTED QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
(UNAUDITED)
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1997
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Total revenues................................ $15,962 $15,341 $ 14,186 $14,586
Gross profit.................................. 8,303 7,525 6,120 6,277
Gross margin.................................. 52.0% 49.1% 43.1% 43.0%
Net income.................................... $ 889 $ 976 $ 502 $ 332
Adjusted EBITDA(1)............................ 6,871 6,838 5,972 6,166
Net cash provided by operating activities..... 4,566 6,015 5,812 3,608
Net cash used in investing activities......... (4,291) (5,271) (3,616) (4,848)
Net cash (used in) provided by financing
activities.................................. $ (473) $ (743) $ (2,197) $ 1,241
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Total revenues................................ $14,392 $13,634 $ 13,749 $15,166
Gross profit(2)............................... 7,020 5,256 6,340 5,755
Gross margin(2)............................... 48.8% 38.6% 46.1% 38.0%
Net income (loss)(2).......................... $ 922 $ (38) $ 540 $ (492)
Adjusted EBITDA(1)............................ 5,174 4,774 5,187 5,651
Net cash provided by operating activities..... 2,657 4,205 3,563 4,232
Net cash used in investing activities......... (6,341) (2,917) (14,664) (2,937)
Net cash provided (used in) by financing
activities.................................. $ 3,684 $(1,288) $ 11,538 $(1,534)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Total revenues................................ $13,166 $13,150 $ 13,130 $13,590
Gross profit.................................. 6,482 6,228 6,041 6,292
Gross margin.................................. 49.2% 47.4% 46.0% 46.3%
Net income.................................... $ 859 $ 623 $ 594 $ 674
Adjusted EBITDA(1)............................ 4,531 4,437 4,652 4,627
Net cash provided by operating activities..... 4,064 2,170 3,304 3,533
Net cash used in investing activities......... (6,102) (5,298) (4,871) (3,454)
Net cash provided (used in) by financing
activities.................................. $ 2,038 $ 3,128 $ 1,566 $ (78)
</TABLE>
- ---------------
(1) Adjusted EBITDA reflects EBITDA, adjusted to exclude the write-down of DPAP
inventories of $1.0 million and $1.2 million for the three months ended June
30, 1996 and December 31, 1996, respectively, and shareholder value expenses
of $0.3 million, $0.6 million, $0.3 million, $0.2 million and $0.6 million
for the three months ended December 31, 1996, March 31, 1997, June 30, 1997,
September 30, 1997 and December 31, 1997, respectively. Adjusted EBITDA
should not be considered in isolation or as a substitute for net income,
cash flows or other income or cash flow data prepared in accordance with
GAAP or as a measure of a company's profitability or liquidity.
(2) Includes expense related to the write-down of DPAP inventories of $1.0
million in the second quarter and a further write-down in the fourth quarter
of 1996 of the remaining $1.2 million carrying value of DPAP inventories.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its equipment purchases primarily
through internally generated funds and borrowings under its existing revolving
credit facility. As an asset intensive business, the Company has required
continued access to capital to support the acquisition of equipment for rental
to its customers. The Company purchased $19.1 million of rental equipment in
1997.
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<PAGE> 44
During 1997 and 1996, net cash flows provided by operating activities were
$20.0 million and $14.7 million, respectively. Net cash flows used in investing
activities were $18.0 million and $26.9 million, respectively, in each of these
periods. The decrease from 1996 resulted from the impact of the BERS
acquisition. Net cash flows (used in) provided by financing activities were
($2.2 million) and $12.4 million respectively in each period.
During 1996 and 1995, net cash flows provided by operating activities were
$14.7 million and $13.1 million, respectively. Net cash flows used in investing
activities were $26.9 million and $19.7 million, respectively, in each of the
periods. The increase in 1996 resulted from the impact of the BERS acquisition.
Net cash flows provided by financing activities were $12.4 million and $6.7
million, respectively, in each of the periods.
POST-RECAPITALIZATION
The Company's principal sources of liquidity are expected to be cash flows
from operating activities and borrowings under the Revolving Credit Facility. It
is anticipated that the Company's principal uses of liquidity will be to fund
capital expenditures related to purchases of movable medical equipment, provide
working capital, meet debt service requirements and finance the Company's
strategic plans.
The Company is capitalized with $100.0 million of Notes and a $30.0 million
senior secured Revolving Credit Facility ($11.5 million of which would have been
funded at December 31, 1997 on a pro forma basis). Interest on loans outstanding
under the Credit Agreement is payable at a rate per annum, selected at the
option of the Company, equal to the Base Rate plus a margin of 1.00% (the "Base
Rate Margin"), or the adjusted Eurodollar Rate plus a margin of 2.25% (the
"Eurodollar Rate Margin"). Commencing September 30, 1998, the Eurodollar Rate
Margin and the Base Rate Margin used to calculate such interest rates may be
adjusted if the Company satisfies certain leverage ratios. The Credit Agreement
contains restrictive covenants which, among other things, limit the incurrence
of additional indebtedness, dividends, transactions with affiliates, asset
sales, acquisitions, mergers and consolidations, liens and encumbrances, and
prepayments of other indebtedness. See "Description of the Revolving Credit
Facility."
The Company believes that, based on current levels of operations and
anticipated growth, its cash from operations, together with other sources of
liquidity, including borrowings available under the Revolving Credit Facility,
will be sufficient over the next several years to fund anticipated capital
expenditures and make required payments of principal and interest on its debt,
including payments due on the Notes and obligations under the Revolving Credit
Facility. The Company believes that its ability to repay the Notes and amounts
outstanding under the Revolving Credit Facility at maturity will require
additional financing. There can be no assurance, however, that any such
financing will be available at such time to the Company, or that any such
financing will be on terms favorable to the Company. In addition, the Company
continually evaluates potential acquisitions and expects to fund such
acquisitions from its available sources of liquidity, including borrowings under
the Revolving Credit Facility.
The Company's expansion and acquisition strategy may require substantial
capital, and no assurance can be given that the Company will be able to raise
any necessary additional funds through bank financing or the issuance of equity
or debt securities on terms acceptable to the Company, if at all.
In the first and second quarters of 1998, the Company expects to incur
additional expenses related to the Recapitalization of approximately $9.2
million, including $2.8 million in severance expense to certain non-continuing
members of management, $3.2 million for prepayment penalties on existing loans
and write-off of corresponding loan origination fees, $1.2 million in investment
banker fees and approximately $2.0 million in additional recapitalization
expenses.
THE YEAR 2000 ISSUE
The Company is currently evaluating the potential impact of the situation
referred to as the "Year 2000 Issue." The Year 2000 Issue concerns the inability
of computer software programs to properly recognize and process date sensitive
information relating to the Year 2000. Beginning in the second quarter of 1998,
the
43
<PAGE> 45
Company will begin evaluating automated Year 2000 tools. Following that
evaluation, the Company will either replace older applications or make such
applications Year 2000 compliant. Certain of the Company's systems, including
general ledger, accounts payable, fixed assets, payroll and human resources, are
currently Year 2000 compliant. The Company's newer applications, which utilize a
two-digit century field, are expected to require little additional effort to be
Year 2000 compliant. Other systems, including the Company's AIMS/ CS software
package licensed to customers, are upgraded annually, and will be made Year 2000
compliant in the next upgrade required in 1999. The Company is also in the
process of evaluating the impact of Year 2000 compliance issues as they relate
to its significant customers and suppliers.
The Company is in the process of determining the costs associated with and
the potential impact of the Year 2000 Issue, but is unable to state at this time
whether such costs are expected to be material.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and display of
comprehensive income and its components (revenue, expenses, gains and losses) in
a full set of general-purpose financial statements. Management does not expect
any differences between net income and comprehensive income. The Company will
adopt SFAS No. 130 effective with its year-end 1998 reporting.
The FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information." SFAS No. 131 establishes standards for reporting
operating segment information in both annual reports and interim financial
reports issued to shareholders. The Company is reviewing the requirements of
SFAS No. 131, and has not determined if it will be required to present segment
information beyond the one segment currently presented. SFAS No. 131 is required
to be adopted effective with its year-end 1998 reporting.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
About Pensions and Other Postretirement Benefits," which standardizes the
disclosure requirements for pensions and other postretirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer as useful.
Management has not yet evaluated the effects of this change on its current
pension disclosures. The Company will adopt SFAS No. 132 effective with its
year-end 1998 reporting.
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." This SOP provides guidance on
accounting for the costs of computer software developed or obtained for internal
use. The Company is reviewing the requirements of the SOP and has not determined
if it is applicable to the Company. SOP 98-1 is required to be adopted by the
Company no later than the year ending December 31, 1999.
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<PAGE> 46
BUSINESS
GENERAL
The Company is a leading nationwide provider of movable medical equipment
to more than 2,800 hospitals and alternate care providers through its equipment
rental and outsourcing programs. The Company's principal rental program is its
innovative Pay-Per-Use program whereby health care providers are charged a per
use rental fee based on daily use of equipment per patient. The Company also
offers other rental programs whereby customers are charged on a daily, weekly or
monthly basis. All of the Company's rental programs include a comprehensive
range of support services which include equipment delivery, training, technical
and educational support, inspection, maintenance, and comprehensive
documentation. The Company also offers total equipment outsourcing through its
Asset Management Partnership ("AMP") program whereby the Company provides,
maintains, manages and tracks substantially all, or a significant portion of, a
customer's movable medical equipment. In addition, the Company sells disposable
supplies related to the equipment it rents. The Company is able to maintain high
utilization of its rental equipment through pooling and redeploying its
equipment among a diverse customer base and adjusting pricing on a customer by
customer basis to compensate for varying utilization levels.
The Company believes that its equipment rental and outsourcing programs are
more cost effective for health care providers than the purchase or lease of
movable medical equipment for the following reasons:
- Increase Equipment Utilization Rates. Health care providers' movable
medical equipment needs fluctuate on a daily basis due to varying patient
census levels and severity of illness and condition. Therefore, a health
care provider's equipment utilization will vary for a given fixed level
of equipment. By utilizing the Company's rental programs, health care
providers can increase the utilization rates of their medical equipment
which allows them to reduce capital expenditures and related costs.
Furthermore, the Company's rental programs, especially its Pay-Per-Use
program, allow customers to more effectively match the costs of variable
equipment use with actual patient charges.
- Outsource Support Services. The Company's full range of support services
are included in its rental fee and the Company believes it can often
provide these support services at a lower cost than customers can
themselves. Accordingly, health care providers can reduce the substantial
operating costs associated with equipment ownership or lease.
- Minimize Equipment Obsolescence Risk. Health care providers can
effectively eliminate the risk of equipment obsolescence through the
Company's short-term rental and Pay-Per-Use programs. The risk of
obsolescence to the Company is reduced because the Company can maintain
high utilization of its equipment.
The Company owns a rental pool of over 56,000 pieces of movable medical
equipment in four primary categories: critical care, monitoring, respiratory
therapy and newborn care. The Company, which is one of only two national
providers of movable medical equipment rental and outsourcing programs,
currently operates through 46 district offices and eight regional service
centers, serving customers in 46 states and the District of Columbia.
MARKET OVERVIEW
The United States health care system includes approximately 5,200 hospitals
and a variety of other alternate care providers such as home care providers,
nursing homes, surgicenters, subacute care facilities and outpatient centers.
These health care providers spend a substantial sum on obtaining capital
equipment, including movable medical equipment. Although health care providers
have a number of options in obtaining this equipment, including purchase, lease
and rental they have historically favored the purchase option in meeting a
substantial portion of their movable medical equipment needs.
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<PAGE> 47
The Company believes that a variety of trends favor rental as an
alternative to purchase or lease:
- Substantial Cost Containment Pressures. The cost containment pressures
under which hospitals and alternate care providers operate have increased
greatly during the past decade as a result of federal regulations that
have significantly affected the extent of reimbursement under Medicare's
prospective payment system, and the Company believes that these pressures
will continue to intensify. In addition, the Company believes that other
third party payors of medical expenses have followed or will follow the
federal government in limiting reimbursement for medical equipment costs.
These would include, but are not limited to, preferred provider
arrangements, discounted fee arrangements and capitated (fixed patient
care reimbursement) managed care arrangements.
- Reduction in the Average Length of Hospital Stays. Over the last 5 years
the average length of hospital stays has continuously shortened. This
reduction has resulted from implementation of the prospective payment
system, an increase in capitated managed care and preferred provider
arrangements and an increase in the amount of care provided outside of
the hospital setting. These factors, together with routine fluctuations
in hospital occupancy, have placed increasing pressures on hospitals to
reduce equipment costs and maximize utilization of medical equipment.
Management estimates that utilization rates of movable medical equipment
purchased by hospitals averages between 45% and 68% based on over 300
studies conducted by the Company and/or these hospitals.
- Continued Growth in the Alternate Care Market. Patient care being
provided by alternate care providers such as home care providers, nursing
homes, surgicenters, subacute care facilities and outpatient centers has
grown dramatically in response to health care cost containment pressures,
changes in reimbursement programs and the reduction in the average length
of hospital stays. Given the Company's nationwide network, it is able to
provide rental and outsourcing programs wherever movable medical
equipment is being used whether in a hospital or alternate care setting.
In addition, alternate care providers are facing the same cost
containment pressures and changing reimbursement programs as hospitals
and have the same incentive to manage their medical equipment costs more
efficiently.
As a result of these trends, health care providers are becoming more
sophisticated in their medical equipment procurement decisions. Health care
providers increasingly are seeking ways to reduce costs and to manage equipment
inventories at optimum utilization levels in order to maximize operating
margins. The Company believes that such analyses often show that its rental
programs and AMP outsourcing arrangements increase equipment utilization rates,
reduce operating costs by allowing for the outsourcing of support services and
minimize equipment obsolescence risk.
COMPANY STRENGTHS
The Company attributes its historical success and its significant
opportunities for continued growth and increased profitability to the following
strengths:
SUPERIOR SERVICE AND STRONG CUSTOMER RELATIONSHIPS. The Company distinguishes
itself by being a leading service company rather than solely an equipment rental
provider and competes on the basis of the value-added, full-service features of
its rental programs in addition to price. The Company's support services include
24-hour-a-day, 365-day-a-year delivery of "patient ready" equipment, technical
support, training in equipment use, quality assurance services, regular
inspections and maintenance of all equipment rented from the Company. As a
result of its focus on service, the Company enjoys strong customer
relationships, as evidenced by the fact that 85 of the Company's 100 largest
customers as of January 1, 1992 are still customers.
NATIONAL NETWORK. The Company is one of only two national providers of a broad
range of movable medical equipment rental and outsourcing programs. The
Company's national network of 46 district offices and eight regional service
centers serves hospital and alternate care customers in 46 states and the
District of Columbia. This broad network allows the Company to meet the
equipment rental and service needs of independent health care facilities,
national and regional health care chains and group purchasing organizations. The
Company's
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<PAGE> 48
national network also enables it to efficiently redeploy equipment throughout
its system in order to maintain high levels of equipment utilization and
customer service.
SOPHISTICATED USE OF INFORMATION TECHNOLOGY. Through its commitment to
information technology, the Company has developed proprietary systems designed
to enhance the Company's and its customers' operating efficiencies. The Company
maintains a complete service history of all rental equipment, including data on
length of placement, transfers, modifications, repairs, maintenance and
inspections which is used to monitor and schedule preventive maintenance and
safety testing programs as well as to maximize equipment utilization. In
addition, the Company's systems provide information that helps customers meet
their equipment documentation needs under applicable industry standards and
regulations. The Company also offers its customers software that allows a health
care provider to track location, utilization and availability of all equipment
rented, owned or leased by that health care provider. These proprietary systems
were designed by the Company's MIS staff which continues to upgrade these
systems and develop new applications.
DEPTH AND BREADTH OF EQUIPMENT RENTAL POOL; PURCHASING POWER. The Company owns
a rental pool of over 56,000 pieces of movable medical equipment in four primary
categories: critical care, monitoring, respiratory therapy and newborn care. The
Company's diversified equipment rental pool includes equipment purchased from
over 50 suppliers in 1997 and enables the Company to offer its customers
numerous models from different manufacturers within each primary equipment
category. The breadth of its product offerings provides the Company with a
competitive strength compared to manufacturers and regional equipment rental
firms that may offer a limited range of models within an equipment category. In
addition, the amount of the Company's annual equipment purchases enables it to
obtain favorable pricing terms from many equipment vendors. As of December 31,
1997, approximately 60% of the Company's rental pool (valued at original cost)
was purchased within the last four years. The Company generally purchases only
new equipment for its rental pool.
EXPERIENCED AND COMMITTED MANAGEMENT TEAM. As part of the Recapitalization, the
Company installed a new senior management team comprised of existing senior
operating managers who have an average of 20 years of experience with the
Company. This team, led by David E. Dovenberg, the Company's previous CFO who
became President and CEO, intends to refocus and expand the Company's growth
strategy. The Management Investors retained 100% of their shares and options in
the Company which, after the Recapitalization and together with the Management
Investors' new investments, represent approximately 20% of the capital stock of
the Company on a fully diluted basis.
ATTRACTIVE RETURN ON RENTAL POOL. The Company's pricing strategy is designed to
generate a pay-back period which is substantially shorter than the useful life
of a particular piece of equipment. The Company calculates its rental rates to
recoup the equipment's purchase price generally within 16 to 18 months.
Excluding related service and support costs, the Company achieves a two year
pay-back period on the original purchase price of the entire rental pool. In
contrast, the average useful life of the equipment in the rental pool has
historically been 8.3 years.
LARGE AND DIVERSIFIED CUSTOMER BASE. The Company provides movable medical
equipment to over 1,670 hospitals and over 1,190 alternate care providers
including home care providers, nursing homes, surgicenters, subacute care
facilities and outpatient centers throughout the United States. In 1997, the
Company's top ten customers accounted for less than 14% of total revenues.
GROWTH STRATEGY
The Company believes that continuing trends toward an aging population,
increased life expectancy and managed care will provide significant growth
opportunities in both hospital and alternate care settings. The Company's
strategy is to achieve continued growth by: (i) increasing business with
existing customers; (ii) providing comprehensive equipment management programs;
(iii) developing business with new customers; (iv) establishing new district
offices; (v) pursuing strategic alliances; and (vi) pursuing strategic
acquisitions.
INCREASE BUSINESS WITH EXISTING CUSTOMERS. The Company seeks to increase the
amount of business it conducts with existing customers by providing additional
equipment to these customers and reaching
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additional departments within its existing hospital customer base. Because these
customers are familiar with the Company's programs and their benefits, the
Company believes that its existing customer base represents a significant
expansion opportunity. The Company generates an average monthly rental revenue
per customer census bed (i.e., occupied bed) of approximately $19. However, the
Company's two largest district offices generate an average monthly rental
revenue per customer census bed of approximately $76.
PROVIDE COMPREHENSIVE EQUIPMENT MANAGEMENT PROGRAMS. The Company offers a total
equipment management outsourcing program called Asset Management Partnership, or
AMP. Through this program, the Company provides, maintains, manages and tracks
substantially all, or a significant portion of, a customer's movable medical
equipment. The AMP program allows health care providers to control capital
spending and certain operating costs through outsourcing and improved
utilization. The Company plans to increase conversions of existing customers
into the AMP program as well as promote the AMP program to a target list of
potential customers. As of December 31, 1997, the Company had 15 AMP accounts,
ten of which the Company has added since January 1, 1996. The average monthly
rental revenue at these ten accounts has increased 122% after conversion to AMP
accounts.
DEVELOP BUSINESS WITH NEW CUSTOMERS. The Company plans to further penetrate the
hospital and alternate care markets by establishing new customer relationships
either individually or through group purchasing organizations. To date, the
Company has signed agreements with several independent group purchasing
organizations, including Premier, the nation's largest health care alliance
enterprise, which give the Company preferred supplier status to over 2,100
hospitals in its existing markets. The Company also plans to expand business
with alternate care providers which increased to 16% of rental revenue for 1997
from 4% in 1992.
ESTABLISH NEW DISTRICT OFFICES. In order to expand its geographic coverage, the
Company plans to establish two new district offices in 1998 and three to four
new district offices in each of the subsequent several years. In choosing
locations for its district offices, the Company considers the nature and size of
the potential customer market, customer concentration within the market,
demographics and vendor relationships. While the major metropolitan areas will
remain a primary focus for expansion, regional clusters of hospitals are also
expected to provide attractive expansion opportunities.
PURSUE STRATEGIC ALLIANCES. The Company intends to pursue strategic alliances
with major manufacturers of movable medical equipment. The nature of these
alliances could include joint marketing arrangements and/or revenue sharing
agreements whereby the Company's rental programs and services would be marketed
by the manufacturer's sales distribution network. Under these agreements, such
manufacturers would not offer the rental programs and services of any other
company.
PURSUE STRATEGIC ACQUISITIONS. The Company plans to pursue strategic
acquisitions that will increase its market share in existing markets, enable the
Company to more quickly penetrate new markets and/or improve the Company's
overall operating efficiencies. In August 1996, the Company acquired BERS which
had revenues of approximately $5.7 million in 1996. The acquisition of BERS
greatly expanded the Company's market share and service capabilities in several
Southeastern markets.
EQUIPMENT MANAGEMENT PROGRAMS
DESCRIPTION
Rental Programs. The Company's primary equipment rental program is its
Pay-Per-Use program whereby customers are able to obtain equipment when they
need it and pay for equipment only when it is used. Customers may also obtain
equipment through daily, weekly or monthly rental programs. When the Company's
customers request a piece of equipment, the Company provides the equipment in
"patient-ready" condition. Upon delivery, each piece of rented equipment is
logged into the Company's tracking system as being placed with the particular
customer. The Company provides the customer with information as to per-use or
other rental rates at or prior to delivery of the equipment, and these rates are
generally effective for a three month period. The Company generally does not use
written agreements with its customers but emphasizes continuous contact and
shared information with each customer. Under the Company's Pay-Per-Use program,
the customer is responsible for keeping a record of each equipment use and
reporting the use to the Company
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<PAGE> 50
on a monthly basis. Many customers report equipment utilization in conjunction
with their patient billing procedures. The Company bills each customer monthly
based on this reported usage. The customer is under no obligation to use the
equipment and may request that the Company remove the equipment at any time.
Correspondingly, the Company may remove equipment or raise the per-use rental
fee if it is under-utilized.
Outsourcing Programs. The scope of the Company's relationship with some of
its largest customers has evolved into the AMP program. Through this program,
the Company provides, maintains, manages and tracks substantially all, or a
significant portion of, a customer's movable medical equipment within the
customer's facility or organization. One or more of the Company's employees are
located on site at the customer's facility to coordinate the equipment
management program and record equipment use. Contracts are typically three to
five years in length and equipment rental rates are generally guaranteed for
three years based on target equipment utilization levels. These rental rates
reflect all of the costs related to the additional services provided as part of
the AMP program and are adjusted to reflect actual equipment utilization levels.
The Company's AMP program enables health care providers to have access to all
appropriate medical equipment available when it is needed, while controlling
their costs through improved utilization and efficiency.
ATTRIBUTES
Full Service. The Company emphasizes the full-service features of its
equipment rental and outsourcing programs. The Company's equipment rental fee
includes 24-hour-a-day, 365-day-a-year delivery of "patient ready" equipment,
technical support, training in equipment use, quality assurance services,
regular inspections and maintenance of all equipment rented from the Company.
The Company maintains a total service history of any rented equipment, which
includes inspection, repair and modification activities for the entire life of
the unit. The Company also offers an optional software package that allows a
particular customer to track location, utilization and availability of all
equipment rented, owned or leased by that customer. Together, these services
allow health care providers to eliminate many of the major overhead costs
associated with the ownership or lease of medical equipment.
Customer Responsiveness. The Company's operational structure is designed
to enable it to respond quickly to a customer's needs. Through its district
offices, the Company maintains both a local and system-wide inventory network
which is designed to assure access to a broad range of medical equipment. The
Company's district offices are typically located close enough to the customers
they serve to allow equipment to be delivered and ready for use generally within
two hours of a request.
Management of Equipment Utilization. The Company seeks to allocate its
pool of rental equipment efficiently among its customers by continually
monitoring customers' equipment utilization levels. The Company reviews customer
utilization routinely and, depending on utilization level, may adjust the rental
fee or redeploy the equipment. This system benefits customers by permitting them
to obtain a lower per-use rental fee in the event of higher utilization
efficiency and benefits the Company as it attempts to maximize the utilization
of the equipment in its inventory. See "-- Operations -- Pricing."
Diverse Equipment Selection. The Company generally purchases new equipment
which it believes to be state-of-the-art from manufacturers with a reputation
for quality, product support and innovation. The Company purchases from a number
of different manufacturers to address its customers' diverse needs with a
special emphasis on equipment which lowers patient care costs while improving
quality of care and treatment outcomes. See "-- Operations -- Equipment
Inventory."
OPERATIONS
Pricing. The Company's rental and AMP program pricing strategy is designed
to generate a pay-back period that is substantially shorter than the useful life
of a particular piece of equipment. The Company seeks to set its rental rates to
recoup the equipment's purchase price generally within 16 to 18 months. On a
customer-specific basis, the Company then develops a rental rate for a given
piece of equipment which takes into consideration the customer's needs with
respect to equipment type, assumed equipment utilization, length of placement,
frequency and extent of support service and volume of business. As a customer's
utilization rate increases, the Company may adjust the rental fee, which
benefits the customer by permitting them to obtain a
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<PAGE> 51
lower rental fee and benefits the Company as it attempts to maximize the
utilization of the equipment inventory. The rental rate is designed not only to
recoup costs but also to provide the Company a targeted financial return on its
investment for the particular category of equipment. Service requirements and
rental rates are generally reviewed on a quarterly basis and rates may be
adjusted as the customer's service needs or utilization levels vary from
expected levels. This evaluation process enables the Company to continuously
monitor actual revenues as compared to targeted return objectives.
Equipment Inventory. The Company purchases movable medical equipment in
the areas of critical care, monitoring, respiratory therapy and newborn care.
Equipment acquisitions may be made to expand the Company's pool of existing
equipment or to add new equipment technologies to the Company's existing rental
pool. The Company considers historical utilization levels, customer demand, life
cycle phase of the equipment and vendor relationships before acquiring such
equipment in order to avoid speculative purchases. In the case of new
technologies, the Company has established a product evaluation committee to
consider new technologies as they become available. This evaluation process for
new products involves many of the review criteria set forth above as well as an
overall evaluation of the potential market demand for the new product.
In making equipment purchases, the Company considers the following factors:
equipment mobility, anticipated utilization level, service intensiveness and
anticipated obsolescence. Of additional consideration is the relative safety of
and the risks associated with such equipment.
The Company seeks to maximize the useful life of its equipment by renting
its older equipment inventory at lower rental rates or bundling such older
equipment with newer equipment in rental programs with price incentives to the
customer. Equipment which is no longer required or desired is either sold,
primarily to non-hospital purchasers, utilized for spare parts or sold for scrap
value.
As of December 31, 1997, the Company owned over 56,000 pieces of equipment
available for use by its customers. The cost of each category of equipment in
the Company's rental pool relative to the entire pool as of December 31, 1997
was: critical care, 68%; monitoring, 22%; respiratory therapy, 8%; and newborn
care, 2%. The following is a list of the principal types of medical equipment
available to the Company's customers by category:
<TABLE>
<S> <C> <C>
CRITICAL CARE MONITORING RESPIRATORY THERAPY
Alternating Pressure/Flotation Adult Monitors Aerosol Tents
Devices Anesthetic Agent Monitors Nebulizers
Ambulatory Infusion Pumps Apnea Monitors Oximeters
Anesthesia Machines Blood Pressure Monitors Oxygen Concentrators
Bazooka(R) Portable Specialty Beds Cardiac Care Systems Adult Ventilators
Blood/Fluid Warmers Electrocardiographs Pediatric Ventilators
Cold Therapy Units End Tidal CO(2) Monitors Portable Ventilators
Continuous Passive Motion (CPM) Fetal Monitors NEWBORN CARE
Devices Intensive Care Systems Incubators
Controllers, Infusion Neonatal Monitors Infant Warmers
Defibrillators Oximeters Phototherapy Devices
Electrosurgical Generators PO(2)/CO(2) Monitors
Heat Therapy Units Recorders and Printers
Hyper-Hypothermia Units Step-Down Telemetry Systems
Infusion Pumps Surgical Monitors
Minimal Invasive Surgical Equipment Telemetry Monitors
Patient Controlled Analgesia (PCA) Urine Output/Temperature Monitors
Sequential Compression Devices (SCD) Vital Signs Monitors
Suction Devices
Syringe Pumps
Ultrasonic Aspirators
Volumetric Infusion Pumps
Wheel Chairs
</TABLE>
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The Company currently acquires substantially all of its medical equipment
from approximately 50 suppliers. The Company's five largest suppliers of movable
medical equipment, which supplied approximately 70% of the Company's direct
movable medical equipment purchases for 1997, are: Nellcor Puritan Bennett Inc.,
Alaris Medical Systems Inc., The Kendall Company, Abbott Laboratories, Inc. and
Baxter Healthcare Corporation. Although the identity of the top ten suppliers
remains relatively constant from year to year, the relative ranking of suppliers
within this group may vary over time. The Company believes that alternative
sources of medical equipment are available to the Company should they be needed.
The Company seeks to ensure availability of equipment at favorable prices.
Although the Company does not generally enter into long-term fixed price
contracts with suppliers of its equipment, the Company may receive price
discounts related to the volume of its purchases. In order to receive strong
vendor support throughout the geographic areas in which it does business, the
Company seeks to structure its equipment purchases to ensure credit to local
representatives of those vendors. The purchase price for equipment generally
ranges from $1,000 to $25,000, with some complete monitoring systems costing
more than $1.0 million.
Information Technology. The Company tracks the history of each piece of
equipment in its inventory on an IBM AS/400 centralized computer system located
at its corporate headquarters. This system provides immediate access to
historical equipment information by the use of remote terminals located in the
corporate headquarters and in each of the Company's district offices and
regional service centers. Data on length of placement, transfers, modifications,
repairs, maintenance and inspections are kept for the life of the equipment and
is used extensively for the establishment of preventive maintenance and safety
testing programs and the improvement of equipment performance. The Company also
tracks utilization for each piece of equipment which helps it to maximize
utilization of all the equipment in its rental pool.
Information as to a customer's rental equipment is also provided to the
customer through the Company's Rental Equipment Documentation System ("REDS")
and the Operator Error Identification System ("OEIS"). REDS and OEIS help the
customer to meet its equipment documentation needs under applicable standards
and regulations. In addition, REDS helps the customer track the utilization
levels of each piece of equipment. Keeping utilization records helps the Company
maximize the utilization of all equipment in its inventory. The Company also
offers an optional software package that allows a particular customer to track
location, utilization and availability of all equipment rented, owned or leased
by that customer.
SALE OF DISPOSABLE PRODUCTS
In order to serve its customers fully, the Company sells disposable medical
supplies used in conjunction with the medical equipment it rents. Examples of
such disposable items include tubing and cassettes for infusion devices. The
Company believes that customers purchase disposables from the Company due to the
convenience of obtaining equipment and related supplies from one source and the
anticipated cost-savings resulting from acquiring disposables only on an
as-needed basis. The Company currently acquires substantially all of its
rental-related medical disposables from approximately 55 suppliers. The five
largest current suppliers of disposables to the Company in 1997, accounting for
over 73% of the Company's disposable purchases for 1997 are: The Kendall
Company; Graseby, Inc.; Gaymar Industries, Inc.; Alaris Medical Systems, Inc.;
and Senecare Enterprises, Inc. The Company believes that alternative purchasing
sources of most disposable medical supplies are available to the Company, if
necessary.
MAINTENANCE
The Company provides all necessary repairs and maintenance of its equipment
and maintains control over the functional testing and safety of all equipment
through its technical staff. Prior to placing equipment with a customer, the
Company applies testing standards designed to ensure the safety of all such
equipment. The Company conducts regular inspections of the equipment either at
one of the Company's district offices or regional service centers, or on-site at
the customer. In order to assist customers in meeting their equipment
documentation needs for purposes of applicable standards or regulations, the
Company maintains a complete record of all inspections, maintenance and repairs
on its REDS computer program. See "-- Operations -- Information Technology" and
"-- Regulation of Medical Equipment."
The Company's equipment is generally initially covered by manufacturers'
warranties, which typically warrant repairs for a period of three to twelve
months from the date of purchase. Because the Company
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employs manufacturer-trained personnel for the technical support of its
equipment, a significant portion of repair and maintenance of the Company's
equipment is conducted by the Company's employees.
MARKETING
The Company markets its rental and equipment management programs primarily
through its direct sales force, which consisted of 67 promotional sales
representatives as of December 31, 1997. In its marketing efforts, the Company
primarily targets key decision makers, such as materials managers, department
heads and directors of purchasing, nursing and central supply, as well as
administrators, chief executive officers and chief financial officers. The
Company also promotes its programs and services to hospital and alternate care
provider groups and associations. The Company develops and provides its direct
sales force with a variety of materials designed to support its promotional
efforts. The Company also uses direct mail advertising, as well as targeted
trade journal advertising to supplement this activity.
From time to time, the Company has developed specific marketing programs
intended to address current market demands. The most significant of such
programs include: the "New Realities" program, which demonstrates the economic
justification for Pay-Per-Use rentals; the AMP program, which presents hospitals
with a total management approach to equipment needs; REDS, which responds to the
equipment documentation and tracking needs of health care providers as a result
of standards set by the Joint Commission on Accreditation of Healthcare
Organizations ("JCAHO") and the Safe Medical Devices Act of 1990 ("SMDA"); and
OEIS, which responds to JCAHO requirements regarding equipment operator
training. See "-- Regulation of Medical Equipment."
DISTRICT OFFICES NETWORK
The Company currently operates through 46 district offices, serving
customers in 46 states and the District of Columbia. District offices are
typically staffed by a district manager, one or more promotional sales
representatives, an administrative assistant and delivery and service personnel
to support customers' needs and district operations. District offices are
responsible for marketing, billing and collection efforts, equipment delivery,
customer training, equipment inspection, maintenance and repair work.
Complementing the district offices are eight regional service centers, which
provide more sophisticated maintenance and repair on equipment. The following
table shows each district office location and the year it opened:
<TABLE>
<CAPTION>
OFFICE YEAR OPENED OFFICE YEAR OPENED
------ ----------- ------ -----------
<S> <C> <C> <C>
Minneapolis, MN.................. 1941 Seattle, WA...................... 1989
Omaha, NE........................ 1972 New Orleans, LA.................. 1990
Bismarck, ND..................... 1973 Charlotte, NC.................... 1990
Fargo, ND........................ 1974 Detroit, MI...................... 1990
Marquette, MI.................... 1975 Anaheim, CA...................... 1990
Madison, WI...................... 1975 Phoenix, AZ...................... 1990
Duluth, MN....................... 1978 Pittsburgh, PA................... 1990
Kansas City, MO.................. 1978 Cincinnati, OH................... 1992
Sioux Falls, SD.................. 1978 Pasadena, CA..................... 1992
Milwaukee, WI.................... 1980 Memphis, TN...................... 1992
Dallas, TX....................... 1981 Houston, TX...................... 1993
San Antonio, TX.................. 1982 Wichita, KS...................... 1993
Atlanta, GA...................... 1983 Rochester, NY.................... 1993
St. Louis, MO.................... 1983 New York, NY..................... 1994
Tampa, FL........................ 1984 San Diego, CA.................... 1994
Cleveland, OH.................... 1985 Richmond, VA..................... 1994
Iowa City, IA.................... 1985 Denver, CO....................... 1995
Chicago, IL...................... 1986 Indianapolis, IN................. 1995
Boston, MA....................... 1986 Jacksonville, FL................. 1995
Philadelphia, PA................. 1986 Sacramento, CA................... 1995
Ft. Lauderdale, FL............... 1987 Portland, OR..................... 1996
Baltimore, MD.................... 1988 Knoxville, TN.................... 1996
San Francisco, CA................ 1989 Raleigh, NC...................... 1996
</TABLE>
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REGULATION OF MEDICAL EQUIPMENT
The Company's customers are subject to documentation and safety reporting
standards with respect to the medical equipment they use, as established by the
following organizations and laws: JCAHO; the Association for Advancement of
Medical Instrumentation; and the SMDA. Some states and municipalities also have
similar regulations. The Company's REDS and OEIS programs are specifically
designed to help customers meet their documentation and reporting needs under
such standards and laws. The Company also monitors changes in law and
accommodates the needs of customers by providing specific product information
and manufacturers' addresses and contacts to these customers upon their request.
Manufacturers of the Company's medical equipment are subject to regulation by
agencies and organizations such as the Food and Drug Administration ("FDA"),
Underwriters Laboratories, the National Fire Protection Association and the
Canadian Standards Association. The Company believes that all medical equipment
it rents conforms to these regulations.
The SMDA expanded the FDA's authority to regulate medical devices. The SMDA
requires manufacturers, distributors and end-users to report information which
"reasonably suggests" the probability that a medical device caused or
contributed to the death, serious injury or serious illness of a patient. The
Company works with its customers to assist them in meeting their reporting
obligations under the SMDA. Although the Company does not believe that it is
subject to the SMDA or its reporting requirements, it is possible that the
Company may be deemed to be a "distributor" of medical equipment under the SMDA
and would then be subject to the reporting obligations and related liabilities
thereunder.
An additional equipment tracking regulation was added to the SMDA on August
29, 1993 which requires the Company to provide information to the manufacturer
regarding the permanent disposal of medical rental equipment and notification of
any change in ownership of certain categories of devices. The Company's medical
tracking systems have been reviewed by the FDA and found to be in substantial
compliance with these regulations.
THIRD PARTY REIMBURSEMENT
The Company's business may be significantly affected by, and the success of
its growth strategies depends on, the availability and nature of reimbursements
to hospitals and other health care providers for their medical equipment costs
under federal programs such as Medicare, and by other third party payors. Under
its prospective payment system adopted in 1983 and later modified in 1991, the
HCFA, which determines Medicare reimbursement levels, reimburses hospitals for
medical treatment at fixed rates according to diagnostic related groups without
regard to actual cost. Under this system of reimbursement, Medicare-related
equipment costs are reimbursed in a single, fixed-rate, per-discharge
reimbursement. This system, and subsequent modifications, is being phased in
over a 10 year period. As a result of the prospective payment system, the manner
in which hospitals incur equipment costs (whether through purchase, lease or
rental) does not impact the extent of hospitals' reimbursement. Since the
Medicare system, to an increasing extent, reimburses health care providers at
fixed rates unrelated to actual equipment costs, hospitals have an incentive to
manage their capital related costs more efficiently and effectively. The Company
believes that hospitals will continue to benefit from cost-containment and
cost-efficiency measures, such as converting existing fixed equipment costs to
variable costs through rental and equipment management programs.
Hospitals and alternate care providers are also facing increased cost
containment pressures from public and private insurers and other managed care
providers, such as health maintenance organizations, preferred provider
organizations and managed fee-for-service plans, as these organizations attempt
to reduce the cost and utilization of health care services. The Company believes
that these payors have followed or will follow the federal government in
limiting reimbursement for medical equipment costs through preferred provider
contracts, discounted fee arrangements and capitated (fixed patient care
reimbursement) managed care arrangements. In addition to promoting managed care
plans, employers are increasingly self funding their benefit programs and
shifting costs to employees through increased deductibles, copayments and
employee contributions. The Company believes that these cost reduction efforts
will place additional pressures on health care providers' operating margins and
will encourage efficient equipment management practices, such as use of the
Company's Pay-Per-Use rental and AMP programs.
53
<PAGE> 55
There are widespread efforts to control health care costs in the United
States and abroad. As an example, the Balanced Budget Act of 1997 significantly
reduces the growth in federal spending on Medicare and Medicaid over the next
five years by reducing annual payment updates to hospitals, changing payment
systems for both skilled nursing facilities and home health care services from
cost-based to prospective payment systems, eliminating annual payment updates
for durable medical equipment, and allowing states greater flexibility in
controlling Medicaid costs at the state level. Until the HCFA issues regulations
implementing this legislation in 1998, the Company cannot reliably predict the
timing of or the exact effect which these initiatives could have on the pricing
and profitability of, or demand for, the Company's products. The Company also
believes it is likely that the efforts by governmental and private payors to
contain costs through managed care and other efforts and to reform health
systems will continue in the future. There can be no assurance that current or
future initiatives will not have a material adverse effect on the Company's
business, financial condition or results of operations.
LIABILITY AND INSURANCE
Although the Company does not manufacture any medical equipment, the
Company's business entails the risk of claims related to the rental and sale of
medical equipment. In addition, the Company's servicing and repair activity with
respect to its rental equipment and its instruction of hospital employees with
respect to the equipment's use are additional sources of potential claims. The
Company has not suffered a material loss due to a claim; however, any such
claim, if made, could have a material adverse effect on the Company's business,
financial condition or results of operations. The Company maintains general
liability coverage, including product liability insurance and excess liability
coverage. Both policies are subject to annual renewal. The Company believes that
its current insurance coverage is adequate. There is no assurance, however, that
claims exceeding such coverage will not be made or that the Company will be able
to continue to obtain liability insurance at acceptable levels of cost and
coverage.
COMPETITION
The Company believes that the strongest competition to its rental and
outsourcing programs is the purchase alternative for obtaining movable medical
equipment. Currently, many hospitals and alternate care providers view rental
primarily as a means of meeting short-term or peak supplemental needs, rather
than as a long-term alternative to purchase. Although the Company believes that
it can demonstrate the cost-effectiveness of renting medical equipment on a
long-term per-use basis, the Company believes that many health care providers
will continue to purchase a substantial portion of their movable medical
equipment.
The Company has one principal competitor in the medical equipment rental
business: Mediq/PRN, a subsidiary of MEDIQ, based in Pennsauken, New Jersey.
Other competition consists of smaller regional companies and some medical
equipment manufacturers and dealers who rent equipment to augment their medical
equipment sales. The Company believes that it can effectively compete with any
of these entities in the geographic regions in which both the Company and these
entities operate.
SERVICE MARKS AND TRADE NAMES
The Company uses the "UHS" and "Universal Hospital Services" names as trade
names and as service marks in connection with the Company's rental of medical
equipment. The Company has registered these and other marks as service marks
with the United States Patent and Trademark Office.
EMPLOYEES
The Company had 384 employees as of December 31, 1996. Following
announcement of the Company's agreement to merge with MEDIQ on February 10,
1997, the Company experienced a gradual loss of employees, primarily among
promotional and corporate personnel. In early August 1997 the Company had 337
employees. As of December 31, 1997, the Company had 362 employees, including 326
full-time and 36 part-time employees. Of such employees, 67 are promotional
sales representatives, 36 are technical support personnel, 61 are employed in
the areas of corporate and marketing and 198 are Company district office support
personnel.
None of the Company's employees is covered by a collective bargaining
agreement, and the Company has experienced no work stoppages to date. The
Company believes that its relations with its employees are good.
54
<PAGE> 56
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below are the names, ages and positions of the persons who serve
as directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
David E. Dovenberg........................ 53 Director, President and Chief Executive
Officer
Jerry D. Horn............................. 60 Director
Steven G. Segal........................... 37 Director
Edward D. Yun............................. 31 Director
Robert H. Braun........................... 46 Vice President, Customer Service and
Sales -- West
Gary L. Preston........................... 55 Vice President, Customer Service and
Sales -- East
Randy C. Engen............................ 41 Vice President, Business Development
Gerald L. Brandt.......................... 48 Vice President, Finance and Chief
Financial Officer
Michael R. Johnson........................ 39 Vice President, Administrative Services
</TABLE>
David E. Dovenberg joined the Company in 1988 as Vice President, Finance
and Chief Financial Officer. Prior to joining the Company, he had been with The
Prudential Insurance Company of America since 1969. From 1979 to 1988, he was a
regional Vice President in the area of corporate investments in private
placements for Prudential Capital Corporation. Mr. Dovenberg is a member of the
Healthcare Financial Management Association and the Financial Executives
Institute. He is also a member of several Boards of Directors: Lund
International Holdings, Inc., a publicly traded manufacturer of appearance
accessories for light trucks, sport utility vehicles and vans; the Minnesota
Chapter of the United Ostomy Association and the Hennepin County Unit of the
American Cancer Society.
Jerry D. Horn is Chairman of the Board of General Nutrition Companies,
Inc., a 3,000-store vitamin and nutritional supplement retail chain operating
under the GNC name. He has served in this capacity since October 1991, and prior
to that, was President and Chief Executive Officer since 1985. Mr. Horn is also
Chairman of the Board of Cinnabon, Inc. and Central Tractor Farm & Country,
Inc., a director of Chevys, Inc. and a Managing Director of Childs Associates.
Steven G. Segal is Senior Managing Director of Childs Associates and has
been at Childs Associates since July 1995. Prior to that time, he was an
executive at Thomas H. Lee Company from August 1987, most recently holding the
position of Managing Director. He is a director of Central Tractor Farm &
Country, Inc., Empire Kosher Poultry, Inc., Jillian's Entertainment Holdings,
Inc., International DiverseFoods, Inc., Big V Supermarkets, Inc., Cinnabon, Inc.
and Fitz and Floyd, Inc.
Edward D. Yun is a Vice President of Childs Associates and has been at
Childs Associates since September 1996. From August 1994 until September 1996 he
was an Associate at DLJ Merchant Banking, Inc. He is a director of International
DiverseFoods, Inc.
Robert H. Braun joined the Company in 1975. He has held many positions
within the Company, culminating in a promotion to Director of Rental and Sales,
West, in 1996. Mr. Braun is responsible for three rental and sales divisions
encompassing twenty-two district offices in the western half of the United
States.
Gary L. Preston joined the Company in 1964. He has served as Divisional
Manager, Central, since 1990, and has been responsible for seven midwestern
district offices. Mr. Preston held many prior positions with the Company,
including serving for thirteen years as District Manager for the company's
largest district office.
Randy C. Engen joined the Company in 1979. Since then he has held multiple
sales management roles including Account, District and Divisional Manager
positions. Throughout his tenure with the Company, Mr. Engen has managed the
Company's Madison, Wisconsin district office, the Company's second largest.
Gerald L. Brandt, C.P.A. joined the Company in 1978 as Manager of
Accounting, and was promoted to Director of Finance and Accounting in 1994.
Prior to joining the Company, Mr. Brandt was Vehicle Accounting Manager for
National Car Rental from 1976 to 1978. From 1974 to 1976, he was an Auditor with
Deloitte, Haskins and Sells. He is a member of the Minnesota State Society of
Certified Public Accountants and the American Institute of Certified Public
Accountants.
Michael R. Johnson joined the Company in 1978. He has served as Director,
Human Resources/Administration since 1990. Prior to that, Mr. Johnson had been
an Instructor in the Training and
55
<PAGE> 57
Development Department, followed by a promotion to Training Manager in 1984 and
to Human Resources Manager in 1989.
EXECUTIVE COMPENSATION
Other than David E. Dovenberg, the Company's current CEO, none of the
Company's other current executive officers served as executive officers during
the last three fiscal years. The following table sets forth information for the
years indicated concerning the compensation awarded to, earned by or paid to the
persons who served as chief executive officer of the Company during the
Company's last three fiscal years, and Mr. Dovenberg (collectively, the "Named
Executive Officers"), for services rendered in all capacities to the Company
during such periods.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION(A) AWARDS
------------------------------------------ ------------
AWARDS PAYOUTS ALL OTHER
------------- ------------ COMPEN-
NAME AND SALARY BONUS STOCK OPTIONS LTIP SATION
PRINCIPAL POSITION YEAR ($) ($) (SHARES) PAYOUTS ($)(B)
------------------ ---- -------- -------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
David E. Dovenberg................. 1997 159,444 21,839 0 22,304 4,500
President and Chief Executive
Officer 1996 170,631 5,904 10,740 23,306 4,500
1995 169,574 28,881 11,200 0 4,500
Thomas A. Minner................... 1997 241,028 49,530 0 71,413 4,500
Former Chief Executive Officer 1996 268,248 14,177 21,480 72,548 4,500
1995 271,476 69,353 22,400 0 4,500
</TABLE>
- ---------------
(a) The amounts shown in Annual Compensation for 1997, 1996 and 1995 reflect
salary, bonus and other annual compensation awarded to, earned by or paid to
the persons listed for services rendered to the Company and its
subsidiaries. The Company had a bonus plan (the "Executive Bonus Plan") in
which executives participated. Such bonuses were paid shortly after the end
of such fiscal year.
(b) The amounts shown in this column represent contributions by the company for
the named executive officer to the Universal Hospital Services, Inc.
Long-Term Savings Plan for the fiscal year indicated.
The Executive Bonus Plan provided for payment of cash compensation upon the
achievement of predetermined corporate and/or business unit and individual
performance goals during the calendar year.
The following table reflects awards made under the Company's Long-Term
Incentive Plan (the "LTIP") described above during the fiscal year ended
December 31, 1997 to the executive officers named in the Summary Compensation
Table above. Any payments earned and made under the LTIP are reported in the
Summary Compensation Table in the year paid. The LTIP was terminated on February
25, 1998, with pro-rated payments to be made in April 1998. The total amount to
be paid out is $75,600, including $10,630 to Mr. Dovenberg and $32,144 to Mr.
Minner.
LONG-TERM INCENTIVE PLANS -- AWARDS DURING YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
NUMBER OF
NAME UNITS(1)
---- ---------
<S> <C>
David E. Dovenberg.......................................... 47,822
Thomas A. Minner............................................ 144,611
</TABLE>
- ---------------
(1) Each unit represents one dollar of a targeted cash payment to be made upon
achievement of certain cumulative performance goals over a three-year
period. Performance goals are based on target levels of pre-tax income and
rental revenues, and the payouts are adjusted pursuant to a formula which
adjusts for performance against the target goals.
56
<PAGE> 58
EMPLOYEE PENSION PLAN
The following table sets forth various estimated maximum annual pension
benefits under a combination of the Company's qualified non-contributory defined
benefit pension plan and non-qualified supplemental pension plan, maintained for
certain highly compensated employees (together the "Pension Plans"), on a
straight life annuity basis, based upon Social Security benefits now available,
assuming retirement at age 65 at various levels of compensation and specified
remuneration and years of credited service. Amounts shown are subject to Social
Security offset.
The non-qualified supplemental pension plan was terminated on February 25,
1998 with amounts paid out on March 4, 1998. Total amounts paid out under this
plan were $475,659, including payouts to Mr. Dovenberg of $31,240 and Mr. Minner
of $290,933.
<TABLE>
<CAPTION>
YEARS OF CREDITED SERVICE
-------------------------------------
COMPENSATION 5 10 20 30
------------ ------ ------ ------ -------
<S> <C> <C> <C> <C>
100,000........................................ 6,407 12,814 25,628 32,034
125,000........................................ 8,407 16,814 33,628 42,034
150,000........................................ 10,407 20,814 41,628 52,034
200,000........................................ 14,407 28,814 57,628 72,034
300,000........................................ 22,407 44,814 89,628 112,034
</TABLE>
A participant's remuneration covered by the Pension Plans is his or her
average salary (as reported in the Summary Compensation Table) for the five
consecutive plan years in which the employee received his or her highest average
compensation. The table does not reflect certain limitations on annual benefits
payable imposed by the Internal Revenue Code, because the Company's
non-qualified supplemental pension plan provides for the payment of additional
benefits so that retiring employees may receive, in the aggregate, the benefits
they would have been entitled to receive had such limitations not been imposed.
As of December 31, 1997, Mr. Minner and Mr. Dovenberg had 28.0 and 9.7 years of
credited service, respectively, under the Pension Plan.
EMPLOYMENT AGREEMENTS
Pursuant to a letter agreement dated November 25, 1997, (the "Dovenberg
Employment Agreement"), David E. Dovenberg, Chief Financial Officer of the
Company, agreed to serve as President and Chief Executive Officer of the Company
for a term of three years from the consummation of the Recapitalization, subject
to earlier termination pursuant to the terms thereof. The Dovenberg Employment
Agreement then automatically renews for successive one-year terms unless written
notice of termination is given by either party no less than 30 days prior to the
renewal date. The Dovenberg Employment Agreement provides that during its
initial three year term, Mr. Dovenberg will be a member of the Board of
Directors of the Company, will receive an annual base salary of $200,000,
subject to annual adjustment based on changes in the consumer price index and
Board of Directors review, and will receive a bonus of up to 100% of such annual
base salary, based on achievement of certain EBITDA targets. It also provides
for Mr. Dovenberg's participation in one or more stock option plans to be
adopted by the Company. See "-- Stock Option Plans." Under the Dovenberg
Employment Agreement, if Mr. Dovenberg's employment is terminated by the Company
without cause or because of death or disability, or by Mr. Dovenberg because the
Company has materially breached the Dovenberg Employment Agreement, reduced or
reassigned a material portion of Mr. Dovenberg's duties, reduced Mr. Dovenberg's
annual base salary (other than in certain specified circumstances), required Mr.
Dovenberg to relocate outside the greater Minneapolis, Minnesota area, or if it
is not renewed on expiration of its initial three year term or the first
one-year renewal term, or because certain other specified events have occurred,
the Company will continue to pay Mr. Dovenberg his base salary and provide his
benefits for a period of 18 months from the date of termination. Payment or
benefits under the Dovenberg Employment Agreement to Mr. Dovenberg within this
18-month period would be offset by the value of compensation from Mr.
Dovenberg's subsequent employment during this 18-month period. In addition, the
Dovenberg Employment Agreement contains certain confidentiality and
noncompetition provisions.
57
<PAGE> 59
The Company has entered into employment agreements (each, an "Executive
Employment Agreement," and collectively, the "Executive Employment Agreements")
with each of Messrs. Brandt, Braun, Johnson, Preston and Engen (each, an
"Executive," and collectively, the "Executives"). The Executive Employment
Agreements each have a three year term at the end of which the agreements will
automatically renew for successive one-year terms unless terminated by either
party thereto no less than 30 days prior to the renewal date. Pursuant to the
Executive Employment Agreements, from and after the consummation of the
Recapitalization, the Executives each receive an annual base salary of $125,000,
subject to annual adjustment based on changes in the consumer price index and
Board of Directors review, and are eligible to receive a bonus of up to 100% of
their respective annual base salaries based on achievement of certain EBITDA
targets.
The Executive Employment Agreements also provide that the Executives are
entitled to receive stock options pursuant to one or more stock option plans
adopted or to be adopted by the Company. See "Stock Option Plans." Under each
Executive Employment Agreement, if an Executive's employment is terminated by
the Company by reason of death or disability, the Company would continue to pay
the Executive, or the Executive's legal representatives, as the case may be,
salary and benefits for a six-month period from the date of termination. If the
Executive's employment is terminated by the Company for other than cause or by
the Executive for good reason (i.e., a breach by the Company of the Executive's
Employment Agreement, certain reductions in salary or duties, required
relocation or other specified events), then the Company would pay the Executive
a prorated bonus for the fiscal year in which the termination occurred, and
would continue to pay the Executive's base salary for a 12-month period from the
date of termination. Payments or benefits under the Executive Employment
Agreement to the Executive within this 12-month period would be offset by the
value of compensation from the Executive's subsequent employment during this
12-month period. If the Executive's employment is terminated for cause or the
Executive resigns without good reason, then all rights to payments (other than
payments for services previously rendered), and all other benefits otherwise due
to the Executive under the Executive Employment Agreement, would cease.
In addition, the Executive Employment Agreements contain certain
confidentiality and noncompetition provisions. Finally, the Executive Employment
Agreements provide that the Executives will enter into stockholders' agreements
with the other equity investors in the Company governing certain aspects of the
relationship among such equity investors and the Company.
STOCK OPTION PLANS
The Company has adopted a stock option plan pursuant to which selected
employees of the Company may generally be granted nonqualified and incentive
stock options. In addition, under the plan, Mr. Dovenberg, the executive
officers and other key employees of the Company will be granted nonqualified
stock options to purchase up to 7.5% of the outstanding Common Stock and Common
Stock equivalents of the Company, on a fully diluted basis. Such options granted
under the plan can vest in whole or in part within five years from the date they
are granted based on the achievement of certain EBITDA targets. If within five
years after the closing of the Recapitalization, the original common stock
investors to the Recapitalization achieve a certain prescribed realized value on
their original investment, then additional options to purchase up to 3.5% of the
outstanding Common Stock and Common Stock equivalents of the Company, on a fully
diluted basis, would be granted to eligible members of management. The Company
currently intends that these additional options would also be granted under its
newly adopted stock option plan. Notwithstanding the foregoing, substantially
all such unvested options will vest eight years following the date of grant,
provided that the optionee has been continuously employed by the Company through
such date. In the event of a change in control, the unvested portion of such
outstanding options would become vested in a proportion equal to the ratio of
such options that have vested as of such date, and the total number of options
that would have vested had the Company achieved the maximum targets for all
periods prior to the change in control. Options outstanding under the Company's
former stock option plan were rolled over and are also covered under the plan.
The maximum number of shares of Common Stock reserved for options under the plan
is five million, subject to adjustment in the event of certain corporate
transactions; provided, however, that the maximum number of shares subject to
options that may be granted to any optionee in any one calendar year is one
million, subject to adjustment in the event of certain corporate transactions.
58
<PAGE> 60
PRINCIPAL SHAREHOLDERS
The following table sets forth information regarding the beneficial
ownership of the Common Stock by each beneficial owner of more than five percent
of the Common Stock, each person serving as a director of the Company and each
named executive officer and all persons serving as directors and executive
officers of the Company as a group. Except as otherwise indicated, the
beneficial owners of the voting stock listed below, based on information
furnished by such owners, have sole investment and voting power with respect to
such shares. The business address for each executive officer of the Company is
in care of the Company.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENTAGE
OWNED(1) OWNED
------------ ----------
<S> <C> <C>
David E. Dovenberg(2)....................................... 2,202,270 13.7%
Gerald L. Brandt............................................ 242,400 1.5%
Robert H. Braun............................................. 44,680 0.3%
Randy C. Engen.............................................. 79,590 0.5%
Michael R. Johnson.......................................... 101,260 0.6%
Gary L. Preston............................................. 102,740 0.7%
J.W. Childs Equity Partners, L.P............................ 12,466,931 79.8%
Steven G. Segal(3).......................................... 12,622,131 80.8%
J.W. Childs Equity Partners, L.P.
One Federal Street
Boston, Massachusetts
Jerry D. Horn(3)............................................ 12,500,905 80.0%
J.W. Childs Equity Partners, L.P.
One Federal Street
Boston, Massachusetts
Edward D. Yun(3)............................................ 12,481,149 79.9%
J.W. Childs Equity Partners, L.P.
One Federal Street
Boston, Massachusetts
All Officers & Directors as a group (nine persons).......... 15,443,263 93.7%
</TABLE>
- ---------------
(1) Includes options to purchase 850,980 shares of Common Stock held by officers
listed which are exercisable within 60 days.
(2) Includes 626,530 shares of Common Stock owned by Mr. Dovenberg's wife.
(3) Includes 12,466,931 shares held by Childs which the shareholder may be
deemed to beneficially own by virtue of his position with Childs Associates.
59
<PAGE> 61
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
STOCKHOLDERS' AGREEMENT
At the closing of the Recapitalization, Management Holders (as defined in
the Stockholders Agreement) and Childs and its affiliates (together, the
"Stockholders") entered into a stockholders' agreement (the "Stockholders'
Agreement") with the Company governing certain aspects of the relationship among
the Stockholders and the Company. The Stockholders' Agreement, among other
things: (i) restricts the ability of the Stockholders to transfer their shares
of Common Stock, subject to certain exceptions; (ii) gives the Company, Childs
and certain Designated Employees (as defined in the Stockholders' Agreement)
certain rights of first refusal with respect to shares of Common Stock held by
certain Management Holders in the event of the termination of the employment of
any such Management Holder with the Company for any reason; (iii) gives each
Management Holder certain rights, subject to certain limitations imposed by the
Credit Agreement (as defined), to require the Company to purchase shares of such
Common Stock held by him, in the event of the termination of his employment with
the Company, other than any such termination by the Company other than for Cause
or resignation by him without Good Reason (as such terms are defined in the
Stockholders' Agreement); and (iv) provides the parties thereto with certain
"tag-along," "drag-along," and "piggyback" registration rights.
MANAGEMENT AGREEMENT
At the closing of the Recapitalization, the Company entered into a
management agreement with Childs Associates providing for payment by the Company
to Childs Associates of (i) a $1.2 million advisory and financing fee in
consideration of Childs Associates' services regarding the planning, structuring
and negotiation of the Recapitalization and (ii) an annual management fee of
$240,000 in consideration of Childs Associates' ongoing provision of certain
consulting and management advisory services. Payments under this management
agreement may be made only to the extent permitted by the Revolving Credit
Facility and the Indenture. The management agreement is for a five-year term,
automatically renewable for successive extension terms of one year, unless
Childs Associates gives notice of termination.
LOANS TO EXECUTIVE OFFICERS
In connection with the Recapitalization, the Company made loans (the
"Loans"), in an aggregate principal amount of approximately $185,000, to certain
executive officers of the Company (the "Borrowers") in connection with their
purchase or retention of ownership of shares of Common Stock. The Loans each
have a term of 10 years and will be secured by a pledge of the shares of Common
Stock owned by such executive officers and will bear interest which is payable
semiannually at a rate equal to the Company's weighted average cost of capital
on the Revolving Credit Facility. The Loans are payable prior to maturity upon a
sale by a Borrower of any or all of the Borrower's equity securities of the
Company or earlier under certain circumstances. The following executive officers
received the following aggregate amount of Loans: David E. Dovenberg,
approximately $100,000, Gary L. Preston, approximately $65,000 and Gerald L.
Brandt, approximately $20,000.
60
<PAGE> 62
DESCRIPTION OF THE REVOLVING CREDIT FACILITY
The Company, as the surviving corporation in the Merger, entered into a
Credit Agreement, dated as of February 25, 1998 (the "Credit Agreement"), with
the lenders party thereto (the "Lenders") and Bankers Trust Company ("Bankers
Trust"), as agent (in such capacity, the "Agent"), pursuant to which the Lenders
have provided a $30 million senior secured revolving credit facility (the
"Revolving Credit Facility") to the Company, of which up to $5 million is
available as a letter of credit sub-facility. Amounts available to the Company
under the Revolving Credit Facility are subject to satisfaction of certain
requirements (including a borrowing base test which limits the amount of loans
outstanding to a certain percentage of eligible receivables and eligible
equipment of the Company and its subsidiaries).
The Revolving Credit Facility will terminate on February 23, 2003 and
outstanding revolving credit loans will be payable on such date or such earlier
date as may be accelerated following the occurrence of any Revolving Credit
Facility event of default. As of December 31, 1997, after giving pro forma
effect to the Recapitalization, the outstanding indebtedness under the Revolving
Credit Facility would have been $11.5 million and unused and available
commitments thereunder would have been $18.5 million.
Borrowings under the Revolving Credit Facility were used to consummate the
Recapitalization, to make certain severance and pension related payments, and to
pay certain fees and expenses owing in connection with the Recapitalization, and
may be used to provide working capital for the Company and its subsidiaries, to
finance certain equipment purchases and for other general corporate purposes.
The obligations under the Revolving Credit Facility are guaranteed by the
Company's subsidiaries, whether now or hereafter existing (the "Guarantors"),
and the obligations of the Company and the Guarantors under their guarantees are
secured by an exclusive first priority perfected security interest in
substantially all of their respective assets (including accounts receivable,
inventory, rental equipment and intangibles) and by an exclusive first priority
perfected pledge of all capital stock and notes owned by the Company and its
subsidiaries. The Notes are effectively subordinated to the obligations under
the Revolving Credit Facility to the extent of the value of the assets securing
the Revolving Credit Facility.
Interest on loans outstanding under the Credit Agreement is payable at a
rate per annum, selected at the option of the Company, equal to the Base Rate
Margin, or the adjusted Eurodollar Rate Margin. Commencing September 30, 1998,
the Eurodollar Rate Margin and the Base Rate Margin used to calculate such
interest rates may be adjusted if the Company satisfies certain leverage ratios.
The Credit Agreement also provides that a commitment fee of 0.50% per annum is
payable on the unutilized amount of the Revolving Credit Facility. A letter of
credit fee equal to the applicable Eurodollar Rate Margin is payable on the
stated amount of outstanding letters of credit and a fronting fee of 0.25% based
on the stated amount of each letter of credit is payable to the issuer of each
letter of credit. Certain other fees shall be payable as have been separately
agreed to by the Company.
"Eurodollar Rate" is defined in the Credit Agreement as the offered
quotation to first-class banks by Bankers Trust in the New York interbank
Eurodollar market for dollar deposits in an amount and maturity corresponding to
the interest period for the specific advance for which such interest rate is
being determined, adjusted for reserves.
"Base Rate" is defined in the Credit Agreement as the higher of (i) the
rate Bankers Trust announces from time to time as its base rate or (ii) the
federal funds rate plus 1/2 of 1% per annum.
All overdue installments of principal and interest of the amounts bear
interest at the higher of 2% in excess of the Base Rate or 2% in excess of the
rate then borne by such borrowings.
Interest on borrowings at the adjusted Eurodollar Rate shall be determined
based on the number of days elapsed over a 360 day year, and shall be payable at
the end of the applicable interest period but in any event not less often than
every three months. Interest on borrowings at the Base Rate shall be determined
based on the number of days elapsed over a 365 day year and shall be payable
quarterly.
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The Credit Agreement contains certain representations and warranties,
certain negative and affirmative covenants, certain conditions and events of
default which are customarily required for similar financings. Such covenants
include restrictions and limitations on dividends, capital expenditures, liens,
leases, incurrence of debt, transactions with affiliates, investments and
certain payments, and on mergers, acquisitions, consolidations and asset sales.
Furthermore, the Company is required to maintain compliance with certain
financial covenants such as a maximum leverage ratio, a maximum fixed charge
test and an interest coverage test. The Credit Agreement also prohibits the
Company from prepaying the Notes.
Events of default under the Credit Agreement include, among other things,
(i) failure to pay principal, interest, fees or other amounts when due; (ii)
violation of covenants; (iii) failure of any representation or warranty to be
true in all material respects when made; (iv) cross payment default or
non-payment default permitting acceleration with respect to or acceleration of
certain indebtedness; (v) change of ownership or control; (vi) certain events of
bankruptcy; (vii) certain judgment defaults; and (viii) certain ERISA events.
The foregoing summary of the Credit Agreement is qualified in its entirety
by reference to such agreement, a copy of which is filed as an exhibit to the
Registration Statement.
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DESCRIPTION OF THE NOTES
The New Notes will be issued under an indenture (the "Indenture"), dated as
of February 25, 1998 by and between the Company and First Trust National
Association, as Trustee (the "Trustee"). The following summary of certain
provisions of the Indenture does not purport to be complete and is subject to,
and is qualified in its entirety by reference to, the Trust Indenture Act of
1939, as amended (the "TIA"), and to all of the provisions of the Indenture,
including the definitions of certain terms therein and those terms made a part
of the Indenture by reference to the TIA as in effect on the date of the
Indenture. A copy of the Indenture may be obtained from the Company or the
Initial Purchaser. The definitions of certain capitalized terms used in the
following summary are set forth below under "-- Certain Definitions." For
purposes of this section, references to the "Company" include only the Company
and not its Subsidiaries. The New Senior Notes are identical in all material
respects to the terms of the Old Senior Notes, except for certain transfer
restrictions and registration rights relating to the Old Senior Notes and except
that, if the Exchange Offer is not consummated by September 23, 1998, the
interest rate on the Old Senior Notes from and including such date until but
excluding the date of consummation of the Exchange Offer will increase by 0.5%.
See "-- Registration Rights."
The Old Notes are, and the New Notes will be unsecured obligations of the
Company, ranking pari passu in right of payment with all other senior unsecured
obligations of the Company.
The Notes will be issued in fully registered form only, without coupons, in
denominations of $1,000 and integral multiples thereof. Initially, the Trustee
will act as Paying Agent and Registrar for the Notes. The Notes may be presented
for registration or transfer and exchange at the offices of the Registrar, which
initially will be the Trustee's corporate trust office. The Company may change
any Paying Agent and Registrar without notice to holders of the Notes (the
"Holders"). The Company will pay principal (and premium, if any) on the Notes at
the Trustee's corporate office in New York, New York. At the Company's option,
interest may be paid at the Trustee's corporate trust office or by check mailed
to the registered address of Holders. Any Notes that remain outstanding after
the completion of the Exchange Offer, together with the Exchange Notes issued in
connection with the Exchange Offer, will be treated as a single class of
securities under the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Old Notes were limited to $180,000,000 aggregate principal amount of
which $100,000,000 aggregate principal amount were issued, and will mature on
March 1, 2008. The New Notes will be treated as a continuation of the Old Notes
which bear interest on the Notes will accrue at the rate of 10 1/4% per annum
and will be payable semiannually in cash on each March 1 and September 1
commencing on September 1, 1998, to the persons who are registered Holders at
the close of business on the February 15 and August 15 immediately preceding the
applicable interest payment date. Interest on the Notes will accrue from the
most recent date to which interest has been paid or, if no interest has been
paid, from and including the date of issuance.
The Notes will not be entitled to the benefit of any mandatory sinking
fund.
REDEMPTION
Optional Redemption. The Notes will be redeemable, at the Company's
option, in whole at any time or in part from time to time, on and after March 1,
2003, upon not less than 30 nor more than 60 days' notice, at the following
redemption prices (expressed as percentages of the principal amount thereof) if
redeemed during the twelve-month period commencing on March 1 of the year set
forth below, plus, in each case, accrued and unpaid interest thereon, if any, to
the date of redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003...................................................... 105.125%
2004...................................................... 103.844%
2005...................................................... 102.563%
2006...................................................... 101.281%
2007 and thereafter....................................... 100.000%
</TABLE>
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Optional Redemption upon Equity Offerings. At any time, or from time to
time, on or prior to March 1, 2001, the Company may, at its option, use the net
cash proceeds of one or more Equity Offerings (as defined below) to redeem up to
35% of the aggregate principal amount of Notes originally issued at a redemption
price equal to 110 1/4% the principal amount thereof plus accrued and unpaid
interest thereon, if any, to the date of redemption; provided that at least 65%
of the principal amount of Notes originally issued remains outstanding
immediately after any such redemption. In order to effect the foregoing
redemption with the proceeds of any Equity Offering, the Company shall make such
redemption not more than 120 days after the consummation of any such Equity
Offering.
As used in the preceding paragraph, "Equity Offering" means a public or
private offering of Qualified Capital Stock of the Company.
Optional Redemption upon a Change of Control. In addition to the rights
set forth above and the obligations set forth below, the Notes will be subject
to redemption, at the option of the Company, in whole or in part, at any time
prior to March 1, 2003 and within 180 days after a Change of Control on not less
than 30 nor more than 60 days' prior notice to each Holder of Notes to be
redeemed, in principal amounts of $1,000 or integral multiples thereof, at a
redemption price equal to the sum of (i) the principal amount thereof plus (ii)
accrued and unpaid interest, if any, to the redemption date plus (iii) the
Applicable Premium.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the Notes are to be redeemed at any
time, selection of Notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which such Notes are listed or, if such Notes are not then listed on
a national securities exchange, on a pro rata basis, by lot or by such method as
the Trustee shall deem fair and appropriate; provided, however, that no Notes of
a principal amount of $1,000 or less shall be redeemed in part; provided,
further, that if a partial redemption is made with the proceeds of an Equity
Offering, selection of the Notes or portions thereof for redemption shall be
made by the Trustee only on a pro rata basis or on as nearly a pro rata basis as
is practicable (subject to DTC procedures), unless such method is otherwise
prohibited. Notice of redemption shall be mailed by first-class mail at least 30
but not more than 60 days before the redemption date to each Holder of Notes to
be redeemed at its registered address. If any Note is to be redeemed in part
only, the notice of redemption that relates to such Note shall state the portion
of the principal amount thereof to be redeemed. A new Note in a principal amount
equal to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original Note. On and after the redemption
date, interest will cease to accrue on Notes or portions thereof called for
redemption as long as the Company has deposited with the Paying Agent funds in
satisfaction of the applicable redemption price pursuant to the Indenture.
CHANGE OF CONTROL
The Indenture provides that upon the occurrence of a Change of Control,
each Holder has the right to require that the Company purchase all or a portion
of such Holder's Notes pursuant to the offer described below (the "Change of
Control Offer"), at a purchase price equal to 101% of the principal amount
thereof plus accrued interest to the date of purchase.
Not later than the 30th day following the date upon which the Change of
Control occurred, the Company must send, by first class mail, a notice to each
Holder, with a copy to the Trustee, which notice shall govern the terms of the
Change of Control Offer. Such notice shall state, among other things, the
purchase date, which must be no earlier than 30 days nor later than 45 days from
the date such notice is mailed, other than as may be required by law (the
"Change of Control Payment Date"). Holders electing to have a Note purchased
pursuant to a Change of Control Offer will be required to surrender the Note,
with the form entitled "Option of Holder to Elect Purchase" on the reverse of
the Note completed, to the Paying Agent at the address specified in the notice
prior to the close of business on the third business day prior to the Change of
Control Payment Date.
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If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
purchase price for all the Notes that might be delivered by Holders seeking to
accept the Change of Control Offer. In the event the Company is required to
purchase outstanding Notes pursuant to a Change of Control Offer, the Company
expects that it would seek third party financing to the extent it does not have
available funds to meet its purchase obligations. However, there can be no
assurance that the Company would be able to obtain such financing.
Neither the Board of Directors of the Company nor the Trustee may waive the
covenant relating to a Holder's right to redemption upon a Change of Control.
Restrictions in the Indenture described herein on the ability of the Company and
its Restricted Subsidiaries to incur additional Indebtedness, to grant liens on
its property, to make Restricted Payments and to make Asset Sales may also make
more difficult or discourage a takeover of the Company, whether favored or
opposed by the management of the Company. Consummation of any such transaction
in certain circumstances may require redemption or repurchase of the Notes, and
there can be no assurance that the Company or the acquiring party will have
sufficient financial resources to effect such redemption or repurchase. Such
restrictions and the restrictions on transactions with Affiliates may, in
certain circumstances, make more difficult or discourage any leveraged buyout of
the Company or any of its Subsidiaries by the management of the Company. While
such restrictions cover a wide variety of arrangements which have traditionally
been used to effect highly leveraged transactions, the Indenture may not afford
the Holders of Notes protection in all circumstances from the adverse aspects of
a highly leveraged transaction, reorganization, restructuring, merger or similar
transaction.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the "Change
of Control" provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Change of Control" provisions of the
Indenture by virtue thereof.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Incurrence of Additional Indebtedness. The Company will not,
and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, assume, guarantee, acquire, become liable,
contingently or otherwise, with respect to, or otherwise become responsible for
payment of (collectively, "incur") any Indebtedness (other than Permitted
Indebtedness); provided, however, that if no Default or Event of Default shall
have occurred and be continuing at the time of or as a consequence of the
incurrence of any such Indebtedness, the Company may incur Indebtedness
(including, without limitation, Acquired Indebtedness) and Subsidiaries of the
Company may incur Acquired Indebtedness, in each case if on the date of the
incurrence of such Indebtedness, after giving effect to the incurrence thereof,
the Consolidated Fixed Charge Coverage Ratio of the Company is greater than (w)
2.0 to 1.0, if the date of such incurrence is prior to March 1, 1999, or (x)
2.25 to 1.0, if the date of such incurrence is on or after March 1, 1999 and
prior to March 1, 2001, or (y) 2.5 to 1.0, if the date of such incurrence is on
or after March 1, 2001.
For the purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Indebtedness or is otherwise entitled to be incurred
pursuant to this covenant, the Company shall, in its sole discretion, classify
such item of Indebtedness in any manner that complies with this covenant and
such items of Indebtedness will be treated as having been incurred pursuant to
only one of such clauses or pursuant to the first paragraph hereof. Accrual of
interest and the accretion of accreted value will not be deemed to be an
incurrence of Indebtedness for purposes of this covenant.
Neither the Company nor any Guarantor will incur any Indebtedness which by
its terms (or by the terms of any agreement governing such Indebtedness) is
subordinated in right of payment to any other Indebtedness of the Company or
such Guarantor, as the case may be, unless such Indebtedness is also by its
terms (or by the terms of any agreement governing such Indebtedness) made
expressly subordinate in right of payment to the Notes or the Guarantee (as
defined) pursuant to subordination provisions that are substantively identical
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to the subordination provisions of such Indebtedness (or such agreement) that
are most favorable to the holders of any other Indebtedness of the Company or
such Guarantor, as the case may be.
Limitation on Restricted Payments. The Company will not, and will not
cause or permit any of its Restricted Subsidiaries to, directly or indirectly,
(a) declare or pay any dividend or make any distribution (other than dividends
or distributions payable in Qualified Capital Stock of the Company) on or in
respect of shares of the Company's Capital Stock to holders of such Capital
Stock, (b) purchase, redeem or otherwise acquire or retire for value (except
from the Company or a Restricted Subsidiary) any Capital Stock of the Company or
any warrants, rights or options to purchase or acquire shares of any class of
such Capital Stock, (c) make any principal payment on, purchase, defease,
redeem, prepay, decrease or otherwise acquire or retire for value, prior to any
scheduled final maturity, scheduled repayment or scheduled sinking fund payment,
any Indebtedness of the Company not held by a Restricted Subsidiary that is
subordinate or junior in right of payment to the Notes (except the prepayment,
purchase, repurchase, or other acquisition or retirement of Indebtedness in
anticipation of satisfying a sinking fund obligation, principal installment or
final maturity in each case within one year of the date of prepayment, purchase,
repurchase or other acquisition or retirement) or (d) make any Investment (other
than Permitted Investments) (each of the foregoing actions set forth in clauses
(a), (b) (c) and (d) being referred to as a "Restricted Payment"), if at the
time of such Restricted Payment or immediately after giving effect thereto, (i)
a Default or an Event of Default shall have occurred and be continuing, (ii) the
Company is not able to incur at least $1.00 of additional Indebtedness (other
than Permitted Indebtedness) in compliance with the "Limitation on Incurrence of
Additional Indebtedness" covenant or (iii) the aggregate amount of Restricted
Payments (including such proposed Restricted Payment) made subsequent to the
Issue Date (the amount expended for such purposes, if other than in cash, being
the fair market value of such property as determined reasonably and in good
faith by the Board of Directors of the Company) shall exceed the sum of: (w) 50%
of the cumulative Consolidated Net Income (or if cumulative Consolidated Net
Income shall be a loss, minus 100% of such loss) of the Company earned
subsequent to the Issue Date and on or prior to the date the Restricted Payment
occurs (the "Reference Date") (treating such period as a single accounting
period); plus (x) 100% of the aggregate net cash proceeds received by the
Company from any Person (other than a Subsidiary of the Company) from the
issuance and sale subsequent to the Issue Date and on or prior to the Reference
Date of Qualified Capital Stock of the Company; plus (y) without duplication of
any amounts included in clause (iii)(x) above, 100% of the aggregate net cash
proceeds of any equity contribution received by the Company from a holder of the
Company's Capital Stock (excluding, in the case of clauses (iii)(x) and (y), any
net cash proceeds from Equity Offerings to the extent used to redeem the Notes
in accordance with the provisions under the caption entitled
"Redemption -- Optional Redemption upon Equity Offerings"); plus (aa) 100% of
the aggregate net cash proceeds received after the Issue Date by the Company
from any Person (other than a Subsidiary of the Company) for debt securities
that have been converted or exchanged into or for Qualified Capital Stock of the
Company (to the extent such debt securities were originally sold for cash) plus
the aggregate amount of cash received by the Company (other than from a
Subsidiary of the Company) in connection with such conversion or exchange, plus
(bb) in the case of the disposition or repayment of any Investment constituting
a Restricted Payment after the Issue Date, an amount equal to the lesser of the
return of capital with respect to such Investment and the initial amount of such
Investment, in either case, less the cost of the disposition of such Investment,
and (cc) so long as the designation thereof was treated as a Restricted Payment
made after the Issue Date, with respect to any Unrestricted Subsidiary that has
been redesignated as a Restricted Subsidiary after the Issue Date, the fair
market value of the Company's interest in such Subsidiary calculated in
accordance with GAAP, provided that such amount shall not in any case exceed the
designation amount with respect to such Restricted Subsidiary upon its
designation.
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph do not prohibit: (1) the payment of any dividend or the
consummation of any purchase or redemption within 60 days after the date of
declaration of such dividend or the giving of any irrevocable notice in respect
of any such purchase or redemption if the dividend or purchase or redemption
would have been permitted on the date of declaration or the giving of each
irrevocable notice; (2) if no Default or Event of Default shall have occurred
and be continuing, the acquisition of any shares of Capital Stock of the
Company, either (i) solely in exchange for shares of Qualified Capital Stock of
the Company or (ii) through the application of net proceeds of a
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substantially concurrent sale for cash (other than to a Subsidiary of the
Company) of shares of Qualified Capital Stock of the Company; (3) if no Default
or Event of Default shall have occurred and be continuing, the purchase,
defeasance, redemption, prepayment or other acquisition or retirement for value
of any Indebtedness of the Company that is subordinate or junior in right of
payment to the Notes either (i) solely in exchange for shares of Qualified
Capital Stock of the Company, or (ii) through the application of net proceeds of
a substantially concurrent sale for cash (other than to a Subsidiary of the
Company) of (A) shares of Qualified Capital Stock of the Company or (B)
Refinancing Indebtedness; (4) so long as no Default or Event of Default shall
have occurred and be continuing, repurchases by the Company of Common Stock of
the Company or stock appreciation rights or similar interests in the Company
from directors, officers or employees of the Company or any of its Subsidiaries
or their authorized representatives upon the death, disability or termination of
employment of such employees, in an aggregate amount not to exceed $750,000 in
any calendar year; (5) Investments in securities not constituting cash or Cash
Equivalents and received in connection with an Asset Sale made pursuant to the
provisions of the covenant described under "-- Certain Covenants -- Limitation
on Asset Sales" below; and (6) payments made in connection with the application
of the net proceeds of the Recapitalization. In determining the aggregate amount
of Restricted Payments made subsequent to the Issue Date in accordance with
clause (iii) of the immediately preceding paragraph, amounts expended pursuant
to clauses (1), (2) and (4) shall be included in such calculation.
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an officers' certificate stating that such Restricted
Payment complies with the Indenture and setting forth in reasonable detail the
basis upon which the required calculations were computed, which calculations may
be based upon the Company's latest available internal quarterly financial
statements.
Limitation on Asset Sales. The Company will not, and will not permit any
of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company or the applicable Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair market
value of the assets sold or otherwise disposed of (as determined in good faith
by the Company's Board of Directors), (ii) at least 75% of the consideration
received by the Company or the Restricted Subsidiary, as the case may be, from
such Asset Sale shall be in the form of cash or Cash Equivalents and is received
at the time of such disposition, and (iii) upon the consummation of an Asset
Sale, the Company shall apply, or cause such Restricted Subsidiary to apply, the
Net Cash Proceeds relating to such Asset Sale within 360 days of receipt thereof
either (A) to prepay any Indebtedness ranking at least pari passu with the Notes
(including amounts under the Credit Agreement) and, in the case of any such
Indebtedness under any revolving credit facility, effect a permanent reduction
in the availability under such revolving credit facility, (B) to make an
investment in properties and assets that replace the properties and assets that
were the subject of such Asset Sale or in properties and assets that will be
used in the business of the Company and its Subsidiaries as existing on the
Issue Date or in businesses reasonably related thereto ("Replacement Assets"),
or (C) a combination of prepayment and investment permitted by the foregoing
clauses (iii)(A) and (iii)(B). On the 361st day after an Asset Sale or such
earlier date, if any, as the Board of Directors of the Company or of such
Restricted Subsidiary determines not to apply the Net Cash Proceeds relating to
such Asset Sale as set forth in clauses (iii)(A), (iii)(B) and (iii)(C) of the
next preceding sentence (each, a "Net Proceeds Offer Trigger Date"), such
aggregate amount of Net Cash Proceeds which have not been applied on or before
such Net Proceeds Offer Trigger Date as permitted in clauses (iii)(A), (iii)(B)
and (iii)(C) of the next preceding sentence (each a "Net Proceeds Offer Amount")
shall be applied by the Company or such Restricted Subsidiary to make an offer
to purchase (the "Net Proceeds Offer") on a date (the "Net Proceeds Offer
Payment Date") not less than 30 nor more than 45 days following the applicable
Net Proceeds Offer Trigger Date, from all Holders on a pro rata basis, that
amount of Notes equal to the Net Proceeds Offer Amount at a price equal to 100%
of the principal amount of the Notes to be purchased, plus accrued and unpaid
interest thereon, if any, to the date of purchase; provided, however, that if at
any time any non-cash consideration received by the Company or any Restricted
Subsidiary of the Company, as the case may be, in connection with any Asset Sale
is converted into or sold or otherwise disposed of for cash (other than interest
received with respect to any such non-cash consideration), then such conversion
or disposition shall be deemed to constitute an Asset Sale hereunder and the Net
Cash Proceeds thereof shall be applied in accordance with this covenant. The
Company may defer any Net Proceeds Offer until there is an aggregate unutilized
Net
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Proceeds Offer Amount equal to or in excess of $5.0 million resulting from one
or more Asset Sales (at which time, the entire unutilized Net Proceeds Offer
Amount, and not just the amount in excess of $5.0 million, shall be applied as
required pursuant to this paragraph). Upon completion of a Net Proceeds Offer
the Net Proceeds Offer Amount shall be reset to zero.
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and its Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under "-- Merger, Consolidation
and Sale of Assets," the successor corporation shall be deemed to have sold the
properties and assets of the Company and its Restricted Subsidiaries not so
transferred for purposes of this covenant, and shall comply with the provisions
of this covenant with respect to such deemed sale as if it were an Asset Sale.
In addition, the fair market value of such properties and assets of the Company
or its Restricted Subsidiaries deemed to be sold shall be deemed to be Net Cash
Proceeds for purposes of this covenant.
Notwithstanding the two immediately preceding paragraphs, the Company and
its Restricted Subsidiaries will be permitted to consummate an Asset Sale
without complying with such paragraphs to the extent (i) at least 75% of the
consideration for such Asset Sale constitutes Replacement Assets and (ii) such
Asset Sale is for fair market value; provided, that any consideration not
constituting Replacement Assets received by the Company and its Restricted
Subsidiaries in connection with any Asset Sale permitted to be consummated under
this paragraph shall constitute Net Cash Proceeds subject to the provisions of
the two preceding paragraphs.
Each Net Proceeds Offer will be mailed to the record Holders as shown on
the register of Holders within 25 days following the Net Proceeds Offer Trigger
Date, with a copy to the Trustee, and shall comply with the procedures set forth
in the Indenture. Upon receiving notice of the Net Proceeds Offer, Holders may
elect to tender their Notes in whole or in part in integral multiples of $1,000
in exchange for cash. To the extent Holders properly tender Notes in an amount
exceeding the Net Proceeds Offer Amount, Notes of tendering Holders will be
purchased on a pro rata basis (based on amounts tendered). A Net Proceeds Offer
shall remain open for a period of 20 business days or such longer period as may
be required by law.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Net Proceeds Offer. To the extent that the
provisions of any securities laws or regulations conflict with the "Asset Sale"
provisions of the Indenture, the Company shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under the "Asset Sale" provisions of the Indenture by virtue
thereof.
Limitation on Dividend and Other Payment Restrictions Affecting
Subsidiaries. The Company will not, and will not cause or permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or
permit to exist or become effective any consensual encumbrance or restriction on
the ability of any Restricted Subsidiary of the Company to (a) pay dividends or
make any other distributions on or in respect of its Capital Stock; (b) make
loans or advances or to pay any Indebtedness or other obligation owed to the
Company or any other Restricted Subsidiary of the Company; or (c) transfer any
of its property or assets to the Company or any other Restricted Subsidiary of
the Company, except for such encumbrances or restrictions existing under or by
reason of: (1) applicable law; (2) the Indenture; (3) customary non-assignment
provisions of any contract or any lease governing a leasehold interest of any
Restricted Subsidiary of the Company; (4) any instrument governing Acquired
Indebtedness, which encumbrance or restriction is not applicable to any Person,
or the properties or assets of any Person, other than the Person or the
properties or assets of the Person so acquired (including, but not limited to,
such Person's direct and indirect Subsidiaries); (5) agreements existing on the
Issue Date to the extent and in the manner such agreements are in effect on the
Issue Date; (6) an agreement entered into for the sale or disposition of all or
substantially all of the Capital Stock or assets of a Restricted Subsidiary or
an agreement entered into for the sale of specified assets (in either case, so
long as such encumbrance or restriction, by its terms, terminates on the earlier
of the termination of such agreement or the consummation of such agreement and
so long as such restriction applies only to the Capital Stock or assets to be
sold); (7) the Credit Agreement; (8) an agreement governing Indebtedness
incurred to Refinance the Indebtedness issued, assumed or incurred pursuant to
an agreement
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referred to in clause (2), (4), (5) or (7) above; provided, however, that the
provisions relating to such encumbrance or restriction contained in any such
Indebtedness are no less favorable to the Company in any material respect as
determined by the Board of Directors of the Company in their reasonable and good
faith judgment than the provisions relating to such encumbrance or restriction
contained in agreements referred to in such clause (2), (4) or (5); (9) any
security or pledge agreements, leases or options (or similar agreements)
containing customary restrictions on transfers of the assets encumbered thereby
or leased or subject to option or on the transfer or subletting of the leasehold
interest represented thereby; or (10) any encumbrances or restrictions imposed
by any amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings of contracts, instruments
or obligations referred to in clauses (1) through (9), provided, that such
amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings are, in the good faith judgment of the
Company, no more restrictive with respect to such encumbrances or restrictions
than those contained in such contracts, instruments or obligations prior to such
amendment, modification, restatement, renewal, increase, supplement, refunding,
replacement or refinancing.
Limitation on Preferred Stock of Restricted Subsidiaries. The Company will
not permit any of its Restricted Subsidiaries to issue any Preferred Stock
(other than to the Company or to a Wholly Owned Restricted Subsidiary of the
Company) or permit any Person (other than the Company or a Wholly Owned
Restricted Subsidiary of the Company) to own any Preferred Stock of any
Restricted Subsidiary of the Company. Notwithstanding the foregoing, nothing in
such covenant will prohibit the ownership of Preferred Stock issued by a person
prior to the time (A) such person becomes a Restricted Subsidiary of the
Company, (B) such person merges with or into a Restricted Subsidiary of the
Company or (C) a Restricted Subsidiary of the Company merges with or into such
person; provided that such Preferred Stock was not issued by such person in
anticipation of a transaction contemplated by subclause (A), (B) or (C) above.
Limitation on Liens. The Company will not, and will not cause or permit
any of its Restricted Subsidiaries to, directly or indirectly, create, incur,
assume or permit or suffer to exist any Liens of any kind against or upon any
property or assets of the Company or any of its Restricted Subsidiaries whether
owned on the Issue Date or acquired after the Issue Date, or any proceeds
therefrom, or assign or otherwise convey any right to receive income or profits
therefrom unless (i) in the case of Liens securing Indebtedness that is
expressly subordinate or junior in right of payment to the Notes, the Notes are
secured by a Lien on such property, assets or proceeds that is senior in
priority to such Liens and (ii) in all other cases, the Notes are equally and
ratably secured, except for (A) Liens existing as of the Issue Date to the
extent and in the manner such Liens are in effect on the Issue Date; (B) Liens
securing obligations under the Credit Agreement; (C) Liens securing the Notes;
(D) Liens of the Company or a Restricted Subsidiary of the Company on assets of
any Subsidiary of the Company; (E) Liens securing Refinancing Indebtedness which
is incurred to Refinance any Indebtedness which has been secured by a Lien
permitted under the Indenture and which has been incurred in accordance with the
provisions of the Indenture; provided, however, that such Liens (A) are no less
favorable to the Holders and are not more favorable to the lienholders with
respect to such Liens than the Liens in respect of the Indebtedness being
Refinanced and (B) do not extend to or cover any property or assets of the
Company or any of its Restricted Subsidiaries not securing the Indebtedness so
Refinanced; and (F) Permitted Liens.
Merger, Consolidation and Sale of Assets. The Company will not, in a
single transaction or series of related transactions, consolidate or merge with
or into any Person, or sell, assign, transfer, lease, convey or otherwise
dispose of (or cause or permit any Restricted Subsidiary of the Company to sell,
assign, transfer, lease, convey or otherwise dispose of) all or substantially
all of the Company's assets (determined on a consolidated basis for the Company
and the Company's Restricted Subsidiaries) whether as an entirety or
substantially as an entirety to any Person unless: (i) either (1) the Company
shall be the surviving or continuing corporation or (2) the Person (if other
than the Company) formed by such consolidation or into which the Company is
merged or the Person which acquires by sale, assignment, transfer, lease,
conveyance or other disposition the properties and assets of the Company and of
the Company's Restricted Subsidiaries substantially as an entirety (the
"Surviving Entity") (x) shall be a corporation organized and validly existing
under the laws of the United States or any State thereof or the District of
Columbia and (y) shall expressly
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assume, by supplemental indenture (in form and substance satisfactory to the
Trustee), executed and delivered to the Trustee, the due and punctual payment of
the principal of, and premium, if any, and interest on all of the Notes and the
performance of every covenant of the Notes, the Indenture and the Registration
Rights Agreement on the part of the Company to be performed or observed; (ii)
immediately after giving effect to such transaction and the assumption
contemplated by clause (i)(2)(y) above (including giving effect to any
Indebtedness and Acquired Indebtedness incurred or anticipated to be incurred in
connection with or in respect of such transaction), the Company or such
Surviving Entity, as the case may be, shall be able to incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
"-- Limitation on Incurrence of Additional Indebtedness" covenant; (iii)
immediately before and immediately after giving effect to such transaction and
the assumption contemplated by clause (i)(2)(y) above (including, without
limitation, giving effect to any Indebtedness and Acquired Indebtedness incurred
or anticipated to be incurred and any Lien granted in connection with or in
respect of the transaction), no Default or Event of Default shall have occurred
or be continuing; and (iv) the Company or the Surviving Entity shall have
delivered to the Trustee an officers' certificate and an opinion of counsel,
each stating that such consolidation, merger, sale, assignment, transfer, lease,
conveyance or other disposition and, if a supplemental indenture is required in
connection with such transaction, such supplemental indenture comply with the
applicable provisions of the Indenture and that all conditions precedent in the
Indenture relating to such transaction have been satisfied.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries of the Company the Capital Stock of which constitutes all or
substantially all of the properties and assets of the Company, shall be deemed
to be the transfer of all or substantially all of the properties and assets of
the Company.
Notwithstanding the foregoing clauses (ii), (iii) and (iv), (A) any
Restricted Subsidiary may consolidate with, merge into or transfer all or part
of its properties and assets to the Company or another Restricted Subsidiary of
the Company and (B) the Company may merge with an Affiliate incorporated solely
for the purpose of reincorporating the Company in another jurisdiction.
The Indenture will provide that upon any consolidation, combination or
merger or any transfer of all or substantially all of the assets of the Company
in accordance with the foregoing, in which the Company is not the continuing
corporation, the successor Person formed by such consolidation or into which the
Company is merged or to which such conveyance, lease or transfer is made shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture and the Notes with the same effect as if such
surviving entity had been named as such.
Limitations on Transactions with Affiliates. (a) The Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly,
enter into any transaction or series of related transactions (including, without
limitation, the purchase, sale, lease or exchange of any property or the
rendering of any service) with, or for the benefit of, any of its Affiliates
(each an "Affiliate Transaction"), other than (x) Affiliate Transactions
permitted under paragraph (b) below and (y) Affiliate Transactions on terms that
are no less favorable than those that might reasonably have been obtained in a
comparable transaction at such time on an arm's-length basis from a Person that
is not an Affiliate of the Company or such Restricted Subsidiary. All Affiliate
Transactions (and each series of related Affiliate Transactions which are
similar or part of a common plan) involving aggregate payments or other property
with a fair market value in excess of $2.5 million shall be approved by the
Board of Directors of the Company or such Restricted Subsidiary, as the case may
be, such approval to be evidenced by a Board Resolution stating that such Board
of Directors has determined that such transaction complies with the foregoing
provisions. If the Company or any Restricted Subsidiary of the Company enters
into an Affiliate Transaction (or a series of related Affiliate Transactions
related to a common plan) that involves an aggregate fair market value of more
than $5.0 million, the Company or such Restricted Subsidiary, as the case may
be, shall, prior to the consummation thereof, obtain a favorable opinion as to
the fairness of such transaction or series of related transactions to the
Company or the relevant Restricted Subsidiary, as the case may be, from a
financial point of view, from an Independent Financial Advisor and file the same
with the Trustee.
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(b) The restrictions set forth in clause (a) shall not apply to (i)
reasonable fees and compensation paid to and indemnity provided on behalf of,
officers, directors, employees or consultants of the Company or any Restricted
Subsidiary of the Company as determined in good faith by the Company's Board of
Directors or senior management; (ii) transactions exclusively between or among
the Company and any of its Restricted Subsidiaries or exclusively between or
among such Restricted Subsidiaries, provided such transactions are not otherwise
prohibited by the Indenture; (iii) Restricted Payments permitted by the
Indenture; (iv) payments made pursuant to the Management Agreement; (v) loans
and advances (or guarantees of third party loans) to officers or employees of
the Company or any of its Restricted Subsidiaries in the ordinary course of
business not to exceed $750,000 at any time outstanding; (vi) any employment
agreement, collective bargaining agreement, employee benefit plan, related trust
agreement, indemnification agreement, benefit plan or similar plan (including
arrangements made with respect to bonuses) for the benefit of directors,
officers or employees of the Company or any of its Restricted Subsidiaries
entered into in the ordinary course of business; and (vii) the transactions and
payments contemplated by any agreement as in effect as of the Issue Date
(including without limitation, the Merger Agreement and the Stockholders'
Agreement).
Limitation of Guarantees by Restricted Subsidiaries. The Company will not
permit any of its Restricted Subsidiaries, directly or indirectly, by way of the
pledge of any intercompany note or otherwise, to assume, guarantee or in any
other manner become liable with respect to any Indebtedness of the Company or
any other Restricted Subsidiary (other than Indebtedness incurred under the
Credit Agreement), unless such Restricted Subsidiary executes and delivers a
supplemental indenture to the Indenture, providing a guarantee of payment of the
Notes by such Restricted Subsidiary (the "Guarantee").
Notwithstanding the foregoing, any such Guarantee by a Restricted
Subsidiary of the Notes shall provide by its terms that it shall be
automatically and unconditionally released and discharged, without any further
action required on the part of the Trustee or any Holder, upon: (i) the
unconditional release of such Restricted Subsidiary from its liability in
respect of the Indebtedness in connection with which such Guarantee was executed
and delivered pursuant to the preceding paragraph; or (ii) any sale or other
disposition (by merger or otherwise) to any Person which is not a Restricted
Subsidiary of the Company of all of the Company's Capital Stock in, or all or
substantially all of the assets of, such Restricted Subsidiary; provided that
(a) such sale or disposition of such Capital Stock or assets is otherwise in
compliance with the terms of the Indenture and (b) such assumption, guarantee or
other liability of such Restricted Subsidiary has been released by the holders
of the other Indebtedness so guaranteed.
Conduct of Business. The Company and its Restricted Subsidiaries will not
engage in any businesses which are not the same, similar, reasonably related,
ancillary or complementary to the businesses in which the Company and its
Restricted Subsidiaries are engaged on the Issue Date.
Reports to Holders. The Indenture provides that the Company will deliver
to the Trustee within 15 days after the filing of the same with the Commission,
copies of the quarterly and annual reports and of the information, documents and
other reports, if any, which the Company is required to file with the Commission
pursuant to Section 13 or 15(d) of the Exchange Act. The Indenture further
provides that, notwithstanding that the Company may not be subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
will file with the Commission, to the extent permitted, and provide the Trustee
and Holders with such annual reports and such information, documents and other
reports specified in Sections 13 and 15(d) of the Exchange Act. The Company will
also comply with the other provisions of TIA sec.314(a).
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(i) the failure to pay interest on any Notes when the same becomes due
and payable and the default continues for a period of 30 days;
(ii) the failure to pay the principal on any Notes, when such
principal becomes due and payable, at maturity, upon redemption or
otherwise (including the failure to make a payment to purchase Notes
tendered pursuant to a Change of Control Offer or a Net Proceeds Offer);
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(iii) a default in the observance or performance of any other covenant
or agreement contained in the Indenture which default continues for a
period of 60 days after the Company receives written notice specifying the
default (and demanding that such default be remedied) from the Trustee or
the Holders of at least 25% of the outstanding principal amount of the
Notes (except in the case of a default with respect to the "Merger,
Consolidation and Sale of Assets" covenant, which will constitute an Event
of Default with such notice requirement but without such passage of time
requirement);
(iv) the failure to pay at final maturity (giving effect to any
applicable grace periods and any extensions thereof) the principal amount
of any Indebtedness of the Company or any Restricted Subsidiary of the
Company and such failure continues for a period of 20 days or more, or the
acceleration of the final stated maturity of any such Indebtedness (which
acceleration is not rescinded, annulled or otherwise cured within 20 days
of receipt by the Company or such Restricted Subsidiary of notice of any
such acceleration) if the aggregate principal amount of such Indebtedness,
together with the principal amount of any other such Indebtedness in
default for failure to pay principal at final maturity or which has been
accelerated, aggregates $5.0 million or more at any time;
(v) one or more judgments in an aggregate amount in excess of $5.0
million shall have been rendered against the Company or any of its
Significant Subsidiaries and such judgments remain undischarged, unpaid or
unstayed for a period of 60 days after such judgment or judgments become
final and non-appealable; or
(vi) certain events of bankruptcy affecting the Company or any of its
Significant Subsidiaries.
If an Event of Default (other than an Event of Default specified in clause
(vi) above with respect to the Company) shall occur and be continuing, the
Trustee or the Holders of at least 25% in principal amount of outstanding Notes
may declare the principal of and accrued interest on all the Notes to be due and
payable by notice in writing to the Company and the Trustee specifying the
respective Event of Default and that it is a "notice of acceleration" (the
"Acceleration Notice"), and the same shall become immediately due and payable.
If an Event of Default specified in clause (vi) above with respect to the
Company occurs and is continuing, then all unpaid principal of, and premium, if
any, and accrued and unpaid interest on all of the outstanding Notes shall ipso
facto become and be immediately due and payable without any declaration or other
act on the part of the Trustee or any Holder.
The Indenture provides that, at any time after a declaration of
acceleration with respect to the Notes as described in the preceding paragraph,
the Holders of a majority in principal amount of the Notes may rescind and
cancel such declaration and its consequences (i) if the rescission would not
conflict with any judgment or decree, (ii) if all existing Events of Default
have been cured or waived except nonpayment of principal or interest that has
become due solely because of the acceleration, (iii) to the extent the payment
of such interest is lawful, interest on overdue installments of interest and
overdue principal, which has become due otherwise than by such declaration of
acceleration, has been paid, (iv) if the Company has paid the Trustee its
reasonable compensation and reimbursed the Trustee for its expenses,
disbursements and advances and (v) in the event of the cure or waiver of an
Event of Default of the type described in clause (vi) of the description above
of Events of Default, the Trustee shall have received an officers' certificate
and an opinion of counsel that such Event of Default has been cured or waived.
No such rescission shall affect any subsequent Default or impair any right
consequent thereto.
The Holders of a majority in principal amount of the Notes may waive any
existing Default or Event of Default under the Indenture, and its consequences,
except a default in the payment of the principal of or interest on any Notes.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture and under the TIA. Subject to the provisions of the
Indenture relating to the duties of the Trustee, the Trustee is under no
obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the Holders, unless such Holders have
offered to the Trustee reasonable indemnity. Subject to all provisions of the
Indenture and applicable law, the Holders of a majority in aggregate principal
amount of the
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then outstanding Notes have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred on the Trustee.
Under the Indenture, the Company is required to provide an officers'
certificate to the Trustee promptly upon any such officer obtaining knowledge of
any Default or Event of Default (provided that such officers shall provide such
certification at least annually whether or not they know of any Default or Event
of Default) that has occurred and, if applicable, describe such Default or Event
of Default and the status thereof.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance"). Such Legal Defeasance means that the Company shall be deemed to
have paid and discharged the entire Indebtedness represented by the outstanding
Notes, except for (i) the rights of Holders to receive payments in respect of
the principal of, premium, if any, and interest on the Notes when such payments
are due, (ii) the Company's obligations with respect to the Notes concerning
issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or
stolen Notes and the maintenance of an office or agency for payments, (iii) the
rights, powers, trust, duties and immunities of the Trustee and the Company's
obligations in connection therewith and (iv) the Legal Defeasance provisions of
the Indenture. In addition, the Company may, at its option and at any time,
elect to have the obligations of the Company released with respect to certain
covenants that are described in the Indenture ("Covenant Defeasance") and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the Notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, reorganization and insolvency events) described under "Events of
Default" will no longer constitute an Event of Default with respect to the
Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders cash in U.S. dollars, non-callable U.S. government obligations,
or a combination thereof, in such amounts as will be sufficient, in the opinion
of a nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on the Notes on the stated date for
payment thereof or on the applicable redemption date, as the case may be; (ii)
in the case of Legal Defeasance, the Company shall have delivered to the Trustee
an opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that (A) the Company has received from, or there has been published
by, the Internal Revenue Service a ruling or (B) since the date of the
Indenture, there has been a change in the applicable federal income tax law, in
either case to the effect that, and based thereon such opinion of counsel shall
confirm that, the Holders will not recognize income, gain or loss for federal
income tax purposes as a result of such Legal Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such Legal Defeasance had not occurred; (iii) in
the case of Covenant Defeasance, the Company shall have delivered to the Trustee
an opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders will not recognize income, gain or loss for federal
income tax purposes as a result of such Covenant Defeasance and will be subject
to federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had not occurred;
(iv) no Default or Event of Default shall have occurred and be continuing on the
date of such deposit (other than a Default or Event of Default resulting from
the borrowing of funds to be applied to such deposit and the grant of any lien
securing such borrowing); (v) such Legal Defeasance or Covenant Defeasance shall
not result in a breach or violation of, or constitute a default under the
Indenture or any other material agreement or instrument to which the Company or
any of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound; (vi) the Company shall have delivered to the Trustee an
officers' certificate stating that the deposit was not made by the Company with
the intent of preferring the Holders over any other creditors of the Company or
with the intent of defeating, hindering, delaying or defrauding any other
creditors of the Company or others; (vii) the Company shall have delivered to
the Trustee an officers' certificate and an opinion of counsel, each stating
that all conditions precedent provided for or relating to the Legal Defeasance
or the Covenant Defeasance have been complied with; (viii) the Company shall
have delivered to the Trustee an opinion of counsel to the effect that after the
91st day following the deposit, the trust funds will not be
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subject to the effect of any applicable bankruptcy, insolvency, reorganization
or similar laws affecting creditors' rights generally; and (ix) certain other
customary conditions precedent are satisfied. Notwithstanding the foregoing, the
opinion of counsel required by clauses (ii) and (iii) above need not be
delivered if all the Notes not therefore delivered to the Trustee for
cancellation (i) have become due and payable, (ii) will become due and payable
on the maturity date within one year, or (iii) are to be called for redemption
within one year under arrangement satisfactory to the Trustee for giving of
notice of redemption by such Trustee in the name, and at the expense of the
Company.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when (i) either (a) all the Notes theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been replaced or paid and
Notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the Company
or discharged from such trust) have been delivered to the Trustee for
cancellation or (b) all Notes not theretofore delivered to the Trustee for
cancellation have become due and payable and the Company has irrevocably
deposited or caused to be deposited with the Trustee funds in an amount
sufficient to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, and interest on the Notes to the date of deposit together with
irrevocable instructions from the Company directing the Trustee to apply such
funds to the payment thereof at maturity or redemption, as the case may be; (ii)
the Company has paid all other sums payable under the Indenture by the Company;
and (iii) the Company has delivered to the Trustee an officers' certificate and
an opinion of counsel stating that all conditions precedent under the Indenture
relating to the satisfaction and discharge of the Indenture have been complied
with.
MODIFICATION OF THE INDENTURE
From time to time, the Company and the Trustee, without the consent of the
Holders, may amend the Indenture for certain specified purposes, including
evidencing the succession of another Person to the Company or any Guarantor and
the assumption by any such successor of the covenants of the Company or any
Guarantor in the Indenture and in the Notes, qualifying or maintaining the
qualification of the Indenture under the TIA, curing ambiguities, defects or
inconsistencies, or making any other change that does not, in the opinion of the
Trustee, adversely affect the rights of any of the Holders in any material
respect. In formulating its opinion on such matters, the Trustee will be
entitled to rely on such evidence as it deems appropriate, including, without
limitation, solely on an opinion of counsel. Other modifications and amendments
of the Indenture may be made with the consent of the Holders of a majority in
principal amount of the then outstanding Notes issued under the Indenture
(including, without limitation, consents obtained in connection with a purchase
of, or tender offer or exchange offer for, Notes), except that, without the
consent of each Holder affected thereby, no amendment may: (i) reduce the amount
of Notes whose Holders must consent to an amendment; (ii) reduce the rate of or
change or have the effect of changing the time for payment of interest,
including defaulted interest, on any Notes; (iii) reduce the principal of or
change or have the effect of changing the fixed maturity of any Notes, or change
the date on which any Notes may be subject to redemption or repurchase, or
reduce the redemption or repurchase price therefor; (iv) make any Notes payable
in money other than that stated in the Notes; (v) make any change in provisions
of the Indenture protecting the right of each Holder to receive payment of
principal of and interest on such Note on or after the due date thereof or to
bring suit to enforce such payment, or permitting Holders of a majority in
principal amount of Notes to waive Defaults or Events of Default; (vi) amend,
change or modify in any material respect the obligation of the Company to make
and consummate a Change of Control Offer in the event of a Change of Control or
make and consummate a Net Proceeds Offer with respect to any Asset Sale that has
been consummated or modify any of the provisions or definitions with respect
thereto after a Change of Control has occurred or the subject Asset Sale has
been consummated; or (vii) modify or change any provision of the Indenture or
the related definitions affecting the ranking of the Notes or any Guarantee in a
manner which adversely affects the Holders.
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GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York but without
giving effect to applicable principles of conflicts of law to the extent that
the application of the law of another jurisdiction would be required thereby.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. During the existence of an Event of Default, the Trustee will
exercise such rights and powers vested in it by the Indenture, and use the same
degree of care and skill in its exercise as a prudent man would exercise or use
under the circumstances in the conduct of his own affairs.
The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Company, to obtain
payments of claims in certain cases or to realize on certain property received
in respect of any such claim as security or otherwise. Subject to the TIA, the
Trustee will be permitted to engage in other transactions; provided that if the
Trustee acquires any conflicting interest as described in the TIA, it must
eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary of
the Company or at the time it merges or consolidates with the Company or any of
its Restricted Subsidiaries or assumed in connection with the acquisition of
assets from such Person and in each case not incurred by such Person in
connection with, or in anticipation or contemplation of, such Person becoming a
Restricted Subsidiary of the Company or such acquisition, merger or
consolidation.
"Affiliate" means, with respect to any specified Person, any other Person
who directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative of the foregoing.
"Applicable Premium" means, with respect to a Note, the greater of (i) 1.0%
of the then outstanding principal amount of such Note and (ii) the excess of (A)
the present value at such time of (1) the redemption price of such Note at March
1, 2003 plus (2) all remaining required interest payments due on such Note
through March 1, 2003, computed using a discount rate equal to the Treasury Rate
plus 50 basis points, over (B) the then outstanding principal amount of such
Note.
"Asset Acquisition" means (a) an Investment by the Company or any
Restricted Subsidiary of the Company in any other Person pursuant to which such
Person shall become a Restricted Subsidiary of the Company or any Restricted
Subsidiary of the Company, or shall be merged with or into the Company or any
Restricted Subsidiary of the Company, or (b) the acquisition by the Company or
any Restricted Subsidiary of the Company of the assets of any Person (other than
a Restricted Subsidiary of the Company) which constitute all or substantially
all of the assets of such Person or comprises any division or line of business
of such Person or any other properties or assets of such Person other than in
the ordinary course of business.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary course
of business), assignment or other transfer for value by the Company or any of
its Restricted Subsidiaries (including any Sale and Leaseback Transaction) to
any Person other than
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the Company or a Restricted Subsidiary of the Company of (a) any Capital Stock
of any Restricted Subsidiary of the Company; or (b) any other property or assets
of the Company or any Restricted Subsidiary of the Company other than in the
ordinary course of business; provided, however, that Asset Sales shall not
include (i) a transaction or series of related transactions for which the
Company or its Restricted Subsidiaries receive aggregate consideration of less
than $1.0 million; (ii) disposals or replacements of obsolete or worn-out
equipment in the ordinary course of business; (iii) the sale or discount, in
each case without recourse (other than recourse for a breach of a representation
or warranty) of accounts receivable arising in the ordinary course of business,
but only in connection with the compromise or collection thereof; (iv) any
Restricted Payment and (v) the sale, lease, conveyance, disposition or other
transfer of all or substantially all of the assets of the Company as permitted
under "Merger, Consolidation and Sale of Assets."
"Board of Directors" means, as to any Person, the board of directors of
such Person or any duly authorized committee thereof.
"Board Resolution" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person
to have been duly adopted by the Board of Directors of such Person and to be in
full force and effect on the date of such certification, and delivered to the
Trustee.
"Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"Capital Stock" means (i) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however
designated and whether or not voting) of corporate stock, including each class
of Common Stock and Preferred Stock of such Person and (ii) with respect to any
Person that is not a corporation, any and all partnership or other equity
interests of such Person.
"Cash Equivalents" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof; (ii)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Corporation ("S&P") or Moody's
Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more
than one year from the date of creation thereof and, at the time of acquisition,
having a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv)
certificates of deposit or bankers' acceptances maturing within one year from
the date of acquisition thereof issued by any bank organized under the laws of
the United States of America or any state thereof or the District of Columbia or
any U.S. branch of a foreign bank having at the date of acquisition thereof
combined capital and surplus of not less than $250,000,000; (v) repurchase
obligations with a term of not more than seven days for underlying securities of
the types described in clause (i) above entered into with any bank meeting the
qualifications specified in clause (iv) above; and (vi) investments in money
market funds which invest substantially all their assets in securities of the
types described in clauses (i) through (v) above.
"Change of Control" means the occurrence of one or more of the following
events: (i) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the assets of the
Company to any Person or group of related Persons for purposes of Section 13(d)
of the Exchange Act (a "Group"), together with any Affiliates thereof (whether
or not otherwise in compliance with the provisions of the Indenture) other than
to the Permitted Holders; (ii) the approval by the holders of Capital Stock of
the Company of any plan or proposal for the liquidation or dissolution of the
Company (whether or not otherwise in compliance with the provisions of the
Indenture); (iii) any Person or Group (other than the Permitted Holders) shall
become the owner, directly or indirectly, beneficially or of record, of shares
representing more than 50% of the aggregate ordinary voting power represented by
the issued and outstanding Capital Stock of the Company; or (iv) the replacement
of a majority of the Board of Directors of the Company over a two-year period
from the directors who constituted the Board of Directors of the
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Company at the beginning of such period, and such replacement shall not have
been approved by a vote of at least a majority of the Board of Directors of the
Company then still in office who either were members of such Board of Directors
at the beginning of such period or whose election as a member of such Board of
Directors was previously so approved.
"Common Stock" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether voting
or non-voting) of such Person's common stock, whether outstanding on the Issue
Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"Company" means Universal Hospital Services, Inc., a Minnesota corporation.
"Consolidated EBITDA" means, with respect to any Person, for any period,
the sum (without duplication) of (i) Consolidated Net Income and (ii) to the
extent Consolidated Net Income has been reduced thereby, (A) all income taxes of
such Person and its Restricted Subsidiaries paid or accrued in accordance with
GAAP for such period (other than income taxes attributable to extraordinary,
unusual or nonrecurring gains or losses or taxes attributable to sales or
dispositions outside the ordinary course of business), (B) Consolidated Interest
Expense and (C) Consolidated Non-cash Charges less any non-cash items increasing
Consolidated Net Income for such period, all as determined on a consolidated
basis for such Person and its Restricted Subsidiaries in accordance with GAAP.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to any
Person, the ratio of Consolidated EBITDA of such Person during the four full
fiscal quarters (the "Four Quarter Period") ending on or prior to the date of
the transaction giving rise to the need to calculate the Consolidated Fixed
Charge Coverage Ratio for which financial statements are available (the
"Transaction Date") to Consolidated Fixed Charges of such Person for the Four
Quarter Period. In addition to and without limitation of the foregoing, for
purposes of this definition, "Consolidated EBITDA" and "Consolidated Fixed
Charges" shall be calculated after giving effect on a pro forma basis for the
period of such calculation to (i) the incurrence or repayment of any
Indebtedness of such Person or any of its Restricted Subsidiaries (and the
application of the proceeds thereof) giving rise to the need to make such
calculation and any incurrence or repayment of other Indebtedness (and the
application of the proceeds thereof), other than the incurrence or repayment of
Indebtedness in the ordinary course of business for working capital purposes
pursuant to working capital facilities, occurring during the Four Quarter Period
or at any time subsequent to the last day of the Four Quarter Period and on or
prior to the Transaction Date, as if such incurrence or repayment, as the case
may be (and the application of the proceeds thereof), occurred on the first day
of the Four Quarter Period and (ii) any Asset Sales or Asset Acquisitions
(including, without limitation, any Asset Acquisition giving rise to the need to
make such calculation as a result of such Person or one of its Restricted
Subsidiaries (including any Person who becomes a Restricted Subsidiary as a
result of the Asset Acquisition) incurring, assuming or otherwise being liable
for Acquired Indebtedness and also including any Consolidated EBITDA (including
any pro forma expense and cost reductions calculated on a basis consistent with
Regulation S-X under the Exchange Act) attributable to the assets which are the
subject of the Asset Acquisition or Asset Sale during the Four Quarter Period)
occurring during the Four Quarter Period or at any time subsequent to the last
day of the Four Quarter Period and on or prior to the Transaction Date, as if
such Asset Sale or Asset Acquisition (including the incurrence, assumption or
liability for any such Acquired Indebtedness) occurred on the first day of the
Four Quarter Period. If such Person or any of its Restricted Subsidiaries
directly or indirectly guarantees Indebtedness of a third Person, the preceding
sentence shall give effect to the incurrence of such guaranteed Indebtedness as
if such Person or any Restricted Subsidiary of such Person had directly incurred
or otherwise assumed such guaranteed Indebtedness. Furthermore, in calculating
"Consolidated Fixed Charges" for purposes of determining the denominator (but
not the numerator) of this "Consolidated Fixed Charge Coverage Ratio," (1)
interest on outstanding Indebtedness determined on a fluctuating basis as of the
Transaction Date and which will continue to be so determined thereafter shall be
deemed to have accrued at a fixed rate per annum equal to the rate of interest
on such Indebtedness in effect on the Transaction Date; (2) if interest on any
Indebtedness actually incurred on the Transaction Date may optionally be
determined at an interest rate based upon a factor of a prime or similar rate, a
eurocurrency interbank offered rate, or other rates, then the interest rate in
effect on the Transaction Date will be deemed to have been in effect during the
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Four Quarter Period; and (3) notwithstanding clause (1) above, interest on
Indebtedness determined on a fluctuating basis, to the extent such interest is
covered by agreements relating to Interest Swap Obligations, shall be deemed to
accrue at the rate per annum resulting after giving effect to the operation of
such agreements.
"Consolidated Fixed Charges" means, with respect to any Person for any
period, the sum, without duplication, of (i) Consolidated Interest Expense, plus
(ii) the product of (x) the amount of all dividend payments on any series of
Preferred Stock of such Person (other than dividends paid in Qualified Capital
Stock) paid, accrued or scheduled to be paid or accrued during such period times
(y) a fraction, the numerator of which is one and the denominator of which is
one minus the then current effective consolidated federal, state and local tax
rate of such Person, expressed as a decimal.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum of, without duplication: (i) the aggregate of the interest
expense of such Person and its Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP, including without
limitation, (a) any amortization of debt discount and amortization or write-off
of deferred financing costs, (b) the net costs under Interest Swap Obligations,
(c) all capitalized interest and (d) the interest portion of any deferred
payment obligation; and (ii) the interest component of Capitalized Lease
Obligations paid, accrued and/or scheduled to be paid or accrued by such Person
and its Restricted Subsidiaries during such period as determined on a
consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person, for any
period, the aggregate net income (or loss) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; provided that there shall be excluded therefrom (a) after-tax gains
or losses from Asset Sales or abandonments or reserves relating thereto, (b)
after-tax items classified as extraordinary or nonrecurring gains or losses, (c)
the net income or loss of any Person acquired in a "pooling of interests"
transaction accrued prior to the date it becomes a Restricted Subsidiary of the
referent Person or is merged or consolidated with the referent Person or any
Restricted Subsidiary of the referent Person, (d) the net income (but not loss)
of any Restricted Subsidiary of the referent Person to the extent that the
declaration of dividends or similar distributions by that Restricted Subsidiary
of that income is restricted by a contract, operation of law or otherwise, (e)
the net income of any Person, other than a Restricted Subsidiary of the referent
Person, except to the extent of cash dividends or distributions paid to the
referent Person or to a Restricted Subsidiary of the referent Person by such
Person, (f) any restoration to income of any contingency reserve, except to the
extent that provision for such reserve was made out of Consolidated Net Income
accrued at any time following the Issue Date, (g) income or loss attributable to
discontinued operations (including, without limitation, operations disposed of
during such period whether or not such operations were classified as
discontinued), and (h) in the case of a successor to the referent Person by
consolidation or merger or as a transferee of the referent Person's assets, any
earnings of the successor corporation prior to such consolidation, merger or
transfer of assets.
"Consolidated Non-cash Charges" means, with respect to any Person, for any
period, the aggregate depreciation, amortization and other non-cash expenses of
such Person and its Restricted Subsidiaries reducing Consolidated Net Income of
such Person and its Restricted Subsidiaries for such period, determined on a
consolidated basis in accordance with GAAP (excluding any such charges
constituting an extraordinary item or loss or any such charge which requires an
accrual of or a reserve for cash charges for any future period).
"Credit Agreement" means the Credit Agreement dated as of February 25,
1998, among the Company, the lenders party thereto in their capacities as
lenders thereunder and Bankers Trust Company, as agent, together with the
related documents thereto (including, without limitation, any guarantee
agreements and security documents), in each case as such agreements may be
amended (including any amendment and restatement thereof), supplemented or
otherwise modified from time to time, including any agreement extending the
maturity of, refinancing, replacing or otherwise restructuring (including
increasing the amount of available borrowings thereunder or adding Restricted
Subsidiaries of the Company as additional borrowers
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or guarantors thereunder) all or any portion of the Indebtedness under such
agreement or any successor or replacement agreement and whether by the same or
any other agent, lender or group of lenders.
"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
"Disqualified Capital Stock" means that portion of any Capital Stock which,
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the sole option of the holder thereof on or prior to the final
maturity date of the Notes.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
any successor statute or statutes thereto.
"Fair market value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair market value
shall be determined by the Board of Directors of the Company acting reasonably
and in good faith and shall be evidenced by a Board Resolution of the Board of
Directors of the Company delivered to the Trustee.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect as of the Issue Date.
"Guarantor" means each of the Company's Restricted Subsidiaries that in the
future executes a supplemental indenture in which such Restricted Subsidiary
agrees to be bound by the terms of the Indenture as a Guarantor; provided that
any Person constituting a Guarantor as described above shall cease to constitute
a Guarantor when its respective Guarantee is released in accordance with the
terms of the Indenture.
"Indebtedness" means with respect to any Person, without duplication, (i)
all Obligations of such Person for borrowed money, (ii) all Obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments, (iii)
all Capitalized Lease Obligations of such Person, (iv) all Obligations of such
Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations and all Obligations under any title retention
agreement (but excluding trade accounts payable and other accrued liabilities
arising in the ordinary course of business that are not overdue 180 days or more
or are being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted), (v) all Obligations for the reimbursement
of any obligor on any letter of credit, banker's acceptance or similar credit
transaction, (vi) guarantees and other contingent obligations in respect of
Indebtedness referred to in clauses (i) through (v) above and clause (viii)
below, (vii) all Obligations of any other Person of the type referred to in
clauses (i) through (vi) which are secured by any lien on any property or asset
of such Person, the amount of such Obligation being deemed to be the lesser of
the fair market value of such property or asset or the amount of the Obligation
so secured, (viii) all Obligations under currency agreements and interest swap
agreements of such Person and (ix) all Disqualified Capital Stock issued by such
Person with the amount of Indebtedness represented by such Disqualified Capital
Stock being equal to the greater of its voluntary or involuntary liquidation
preference and its maximum fixed repurchase price, but excluding accrued
dividends, if any. For purposes hereof, the "maximum fixed repurchase price" of
any Disqualified Capital Stock which does not have a fixed repurchase price
shall be calculated in accordance with the terms of such Disqualified Capital
Stock as if such Disqualified Capital Stock were purchased on any date on which
Indebtedness shall be required to be determined pursuant to the Indenture, and
if such price is based upon, or measured by, the fair market value of such
Disqualified Capital Stock, such fair market value shall be determined
reasonably and in good faith by the Board of Directors of the issuer of such
Disqualified Capital Stock.
"Independent Financial Advisor" means a firm (i) which does not, and whose
directors, officers and employees or Affiliates do not, have a direct or
indirect financial interest in the Company and (ii) which, in
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the judgment of the Board of Directors of the Company, is otherwise independent
and qualified to perform the task for which it is to be engaged.
"Interest Swap Obligations" means the obligations of any Person pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated by
applying a fixed or a floating rate of interest on the same notional amount and
shall include, without limitation, interest rate swaps, caps, floors, collars
and similar agreements.
"Investment" means, with respect to any Person, any direct or indirect loan
or other extension of credit (including, without limitation, a guarantee) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness issued
by, any Person. "Investment" shall exclude extensions of trade credit by the
Company and its Restricted Subsidiaries on commercially reasonable terms in
accordance with normal trade practices of the Company or such Restricted
Subsidiary, as the case may be. For the purposes of the "Limitation on
Restricted Payments" covenant, (i) "Investment" shall include and be valued at
the fair market value of the net assets of any Restricted Subsidiary at the time
that such Restricted Subsidiary is designated an Unrestricted Subsidiary and
shall exclude the fair market value of the net assets of any Unrestricted
Subsidiary at the time that such Unrestricted Subsidiary is designated a
Restricted Subsidiary and (ii) the amount of any Investment shall be the
original cost of such Investment plus the cost of all additional Investments by
the Company or any of its Restricted Subsidiaries, without any adjustments for
increases or decreases in value, or write-ups, write-downs or write-offs with
respect to such Investment, reduced by the payment of dividends or distributions
in connection with such Investment or any other amounts received in respect of
such Investment; provided that no such payment of dividends or distributions or
receipt of any such other amounts shall reduce the amount of any Investment if
such payment of dividends or distributions or receipt of any such amounts would
be included in Consolidated Net Income. If the Company or any Restricted
Subsidiary of the Company sells or otherwise disposes of any Common Stock of any
direct or indirect Restricted Subsidiary of the Company such that, after giving
effect to any such sale or disposition, such Subsidiary is no longer a
Restricted Subsidiary, the Company shall be deemed to have made an Investment on
the date of any such sale or disposition equal to the fair market value of the
Common Stock of such Subsidiary not sold or disposed of.
"Issue Date" means the date of original issuance of the Notes.
"Lien" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof and any agreement to give
any security interest).
"Management Agreement" means the management agreement by and between the
Company and J.W. Childs Associates, L.P., as in effect on the Issue Date.
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents (other
than the portion of any such deferred payment constituting interest) received by
the Company or any of its Restricted Subsidiaries from such Asset Sale net of
(a) out-of-pocket expenses and fees relating to such Asset Sale (including,
without limitation, legal, accounting and investment banking fees and sales
commissions), (b) taxes paid or payable after taking into account any reduction
in consolidated tax liability due to available tax credits or deductions and any
tax sharing arrangements, (c) repayment of Indebtedness that is required to be
repaid in connection with such Asset Sale and (d) appropriate amounts to be
provided by the Company or any Restricted Subsidiary, as the case may be, as a
reserve, in accordance with GAAP, against any liabilities associated with such
Asset Sale and retained by the Company or any Restricted Subsidiary, as the case
may be, after such Asset Sale, including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale.
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"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"Permitted Holders" means J.W. Childs Equity Partners, L.P. and its
Affiliates.
"Permitted Indebtedness" means, without duplication, each of the following:
(i) Indebtedness under the Notes and the Indenture up to $100 million
at any time outstanding;
(ii) Indebtedness incurred pursuant to the Credit Agreement in an
aggregate principal amount at any time outstanding not to exceed the
greater of (x) $30.0 million and (y) the sum of 85% of Eligible Accounts
Receivable and 60% of the net book value of Eligible Rental Equipment, in
each case as defined in the Credit Agreement, reduced, in either case, by
any required permanent repayments pursuant to the provisions of the
"Limitation on Asset Sales" covenant (which are accompanied by a
corresponding permanent commitment reduction in the case of a revolving
credit facility) thereunder;
(iii) other Indebtedness of the Company and its Restricted
Subsidiaries outstanding on the Issue Date reduced by the amount of any
scheduled amortization payment or mandatory prepayments when actually paid
or permanent reductions thereon;
(iv) Interest Swap Obligations of the Company covering Indebtedness of
the Company or any of its Restricted Subsidiaries; provided, however, that
such Interest Swap Obligations are entered into to protect the Company and
its Restricted Subsidiaries from fluctuations in interest rates on
Indebtedness incurred in accordance with the Indenture to the extent the
notional principal amount of such Interest Swap Obligation does not exceed
the principal amount of the Indebtedness to which such Interest Swap
Obligation relates;
(v) Indebtedness of a Restricted Subsidiary of the Company to the
Company or to a Restricted Subsidiary of the Company for so long as such
Indebtedness is held by the Company or a Restricted Subsidiary of the
Company or the lenders or collateral agent under the Credit Agreement, in
each case subject to no Lien held by a Person other than the Company or a
Restricted Subsidiary of the Company or the lenders or collateral agent
under the Credit Agreement; provided that if as of any date any Person
other than the Company or a Restricted Subsidiary of the Company or the
lenders or collateral agent under the Credit Agreement owns or holds any
such Indebtedness or holds a Lien in respect of such Indebtedness, such
date shall be deemed the incurrence of Indebtedness not constituting
Permitted Indebtedness by the issuer of such Indebtedness;
(vi) Indebtedness of the Company to a Restricted Subsidiary of the
Company for so long as such Indebtedness is held by a Restricted Subsidiary
of the Company or the lenders or collateral agent under the Credit
Agreement, in each case subject to no Lien held by a Person other than the
lenders or the collateral agent under the Credit Agreement; provided that
(a) any Indebtedness of the Company to any Restricted Subsidiary of the
Company is unsecured and subordinated, pursuant to a written agreement, to
the Company's obligations under the Indenture and the Notes and (b) if as
of any date any Person other than a Restricted Subsidiary of the Company
owns or holds any such Indebtedness or any Person holds a Lien in respect
of such Indebtedness, such date shall be deemed the incurrence of
Indebtedness not constituting Permitted Indebtedness by the Company;
(vii) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument inadvertently
(except in the case of daylight overdrafts) drawn against insufficient
funds in the ordinary course of business; provided, however, that such
Indebtedness is extinguished within three business days of incurrence;
(viii) Indebtedness of the Company or any of its Restricted
Subsidiaries represented by letters of credit for the account of the
Company or such Restricted Subsidiary, as the case may be, in order to
provide security for workers' compensation claims, payment obligations in
connection with self-insurance or similar requirements in the ordinary
course of business;
(ix) Refinancing Indebtedness;
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(x) additional Indebtedness of the Company and its Restricted
Subsidiaries in an aggregate principal amount not to exceed $10.0 million
at any one time outstanding;
(xi) Purchase Money Indebtedness and Capitalized Lease Obligations in
an aggregate amount for all Indebtedness incurred by the Company or any
Restricted Subsidiary pursuant to this subclause (xi) not to exceed $5.0
million at any one time outstanding;
(xii) guarantees of Indebtedness otherwise permitted under the
Indenture; and
(xiii) Indebtedness of the Company or any Restricted Subsidiary
consisting of guarantees, indemnities or obligations in respect of purchase
price adjustments in connection with the acquisition or disposition of
assets, including, without limitation shares of Capital Stock.
"Permitted Investments" means:
(i) Investments by the Company or any Restricted Subsidiary of the
Company in any Person that is or will become immediately after such
Investment a Restricted Subsidiary of the Company or that will merge or
consolidate into the Company or a Restricted Subsidiary of the Company;
(ii) Investments in the Company by any Restricted Subsidiary of the
Company; provided that any Indebtedness evidencing such Investment is
unsecured and subordinated, pursuant to a written agreement, to the
Company's obligations under the Notes and the Indenture;
(iii) investments in cash and Cash Equivalents;
(iv) loans and advances to employees and officers of the Company and
its Restricted Subsidiaries in the ordinary course of business for bona
fide business purposes (including to permit the purchase of or to carry
Capital Stock of the Company) not in excess of $500,000 at any one time
outstanding;
(v) Interest Swap Obligations entered into in the ordinary course of
the Company's or its Restricted Subsidiaries' businesses and otherwise in
compliance with the Indenture;
(vi) other Investments not to exceed $7.5 million at any one time
outstanding; provided that on the date such Investment is made, after
giving effect to such Investment, the Consolidated Fixed Charge Coverage
Ratio of the Company is greater than (x) 2.25 to 1.0 if the Investment is
made prior to March 1, 2001 and (y) 2.50 to 1.0 if the Investment is made
on or after March 1, 2001;
(vii) Investments in securities of trade creditors or customers
received pursuant to any plan of reorganization or similar arrangement upon
the bankruptcy or insolvency of such trade creditors or customers;
(viii) Investments made by the Company or its Restricted Subsidiaries
as a result of consideration received in connection with an Asset Sale made
in compliance with the "Limitation on Asset Sales" covenant;
(ix) Investments the payment of which consists exclusively of
Qualified Capital Stock of the Company;
(x) Investments in existence on the Issue Date;
(xi) guarantees of Indebtedness otherwise permitted under the
Indenture;
(xii) receivables owing to the Company or any Restricted Subsidiary,
if created or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms; and
(xiii) Investments consisting of Permitted Indebtedness.
"Permitted Liens" means the following types of Liens:
(i) Liens for taxes, assessments or governmental charges or claims
either (a) not delinquent or (b) contested in good faith by appropriate
proceedings and as to which the Company or its Restricted Subsidiaries
shall have set aside on its books such reserves as may be required pursuant
to GAAP;
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(ii) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or
being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof;
(iii) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance
and other types of social security, including any Lien securing letters of
credit issued in the ordinary course of business consistent with past
practice in connection therewith, or to secure the performance of tenders,
statutory obligations, surety and appeal bonds, bids, leases, government
contracts, performance and return-of-money bonds and other similar
obligations (exclusive of obligations for the payment of borrowed money);
(iv) judgment Liens not giving rise to an Event of Default;
(v) easements, rights-of-way, zoning restrictions, eminent domain
proceedings and other similar charges or encumbrances in respect of real
property not interfering in any material respect with the ordinary conduct
of the business of the Company or any of its Restricted Subsidiaries;
(vi) any interest or title of a lessor under any Capitalized Lease
Obligation; provided that such Liens do not extend to any property or
assets which is not leased property subject to such Capitalized Lease
Obligation;
(vii) purchase money Liens to finance the acquisition, construction or
improvement in the ordinary course of business of property or assets of the
Company or any Restricted Subsidiary of the Company; provided, however,
that (A) the related purchase money Indebtedness shall not exceed the cost
of such acquisition, construction or improvement of such property or assets
and shall not be secured by any property or assets of the Company or any
Restricted Subsidiary of the Company other than the property and assets so
acquired (whether through the direct acquisition of such property or assets
or indirectly through the acquisition of the Capital Stock of any Person
owning such property or assets or completion of construction or
improvement), constructed or improved and (B) the Lien securing such
Indebtedness shall be created within 90 days of such acquisition;
(viii) Liens upon specific items of inventory or other goods and
proceeds of any Person securing such Person's obligations in respect of
bankers' acceptances issued or created for the account of such Person to
facilitate the purchase, shipment or storage of such inventory or other
goods;
(ix) Liens securing reimbursement obligations with respect to
commercial letters of credit which encumber documents and other property
relating to such letters of credit and products and proceeds thereof;
(x) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of the Company
or any of its Restricted Subsidiaries, including rights of offset and
set-off;
(xi) Liens securing Interest Swap Obligations which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted under the
Indenture;
(xii) Liens securing Acquired Indebtedness incurred in accordance with
the "Limitation on Incurrence of Additional Indebtedness" covenant;
provided that (A) such Liens secured such Acquired Indebtedness at the time
of and prior to the incurrence of such Acquired Indebtedness by the Company
or a Restricted Subsidiary of the Company and were not granted in
connection with, or in anticipation of, the incurrence of such Acquired
Indebtedness by the Company or a Restricted Subsidiary of the Company and
(B) such Liens do not extend to or cover any property or assets of the
Company or of any of its Restricted Subsidiaries other than the property or
assets that secured the Acquired Indebtedness prior to the time such
Indebtedness became Acquired Indebtedness of the Company or a Restricted
Subsidiary of the Company and are no more favorable to the lienholders than
those securing the Acquired Indebtedness prior to the incurrence of such
Acquired Indebtedness by the Company or a Restricted Subsidiary of the
Company;
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<PAGE> 85
(xiii) Liens existing as of the Issue Date;
(xiv) Liens securing Indebtedness under the Credit Agreement incurred
under clauses (ii) and (x) of the definition of Permitted Indebtedness;
(xv) Liens in favor of the Company or a Restricted Subsidiary;
(xvi) Liens on property or assets of the Company or any Restricted
Subsidiary securing Indebtedness incurred under clause (x) of the
definition of "Permitted Indebtedness";
(xvii) licenses, leases or subleases to third parties;
(xviii) Liens arising from precautionary Uniform Commercial Code
financing statements relating to operating leases of the Company and its
Restricted Subsidiaries;
(xix) Liens incurred in the ordinary course of business of the Company
or any Restricted Subsidiary of the Company with respect to obligations
that do not exceed $7.5 million at any one time outstanding and that (a)
are not incurred in connection with the borrowing of money or the obtaining
of advances or credit (other than trade credit in the ordinary course of
business) and (b) do not materially detract from the value of the property
or materially impair the use thereof in the ordinary course of business of
the Company and its Restricted Subsidiaries; and
(xx) any extension, renewal or replacement, in whole or in part, of
any Lien described in the foregoing clauses (i) through (xix); provided
that the lien so extended, renewed or replaced does not extent to any
additional property or assets.
"Person" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, or a governmental agency or political
subdivision thereof.
"Preferred Stock" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"Purchase Money Indebtedness" means Indebtedness of the Company or its
Restricted Subsidiaries incurred for the purpose of financing all or any part of
the purchase price or the cost of installation, construction or improvement of
any property and any Refinancing thereof.
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
"Refinance" means, in respect of any security or Indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or
to issue a security or Indebtedness in exchange or replacement for, such
security or Indebtedness in whole or in part. "Refinanced" and "Refinancing"
shall have correlative meanings.
"Refinancing Indebtedness" means any Refinancing by the Company or any
Restricted Subsidiary of the Company of Indebtedness incurred in accordance with
the "Limitation on Incurrence of Additional Indebtedness" covenant (other than
pursuant to clause (ii), (iv), (v), (vi), (vii), (viii), (x) or (xi) of the
definition of Permitted Indebtedness), in each case that does not (1) result in
an increase in the aggregate principal amount of Indebtedness of such Person as
of the date of such proposed Refinancing (plus the amount of any premium
required to be paid under the terms of the instrument governing such
Indebtedness and plus the amount of reasonable expenses incurred by the Company
in connection with such Refinancing) or (2) create Indebtedness with (A) a
Weighted Average Life to Maturity that is less than the Weighted Average Life to
Maturity of the Indebtedness being Refinanced or (B) a final maturity earlier
than the final maturity of the Indebtedness being Refinanced; provided that (x)
if such Indebtedness being Refinanced is Indebtedness of the Company, then such
Refinancing Indebtedness shall be Indebtedness solely of the Company and (y) if
such Indebtedness being Refinanced is subordinate or junior to the Notes, then
such Refinancing Indebtedness shall be subordinate to the Notes at least to the
same extent and in the same manner as the Indebtedness being Refinanced.
"Restricted Subsidiary" of any Person means any Subsidiary of such Person
which at the time of determination is not an Unrestricted Subsidiary.
"Sale and Leaseback Transaction" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Restricted Subsidiary of any property, whether owned
by the Company or any Restricted Subsidiary at the Issue Date or later acquired,
which has been or is to be sold or transferred by the Company or such Restricted
Subsidiary to such Person or
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<PAGE> 86
to any other Person from whom funds have been or are to be advanced by such
Person on the security of such Property.
"Significant Subsidiary" shall have the meaning set forth in Rule 1.02(w)
of Regulation S-X under the Securities Act.
"Subsidiary", with respect to any Person, means (i) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors under ordinary circumstances
shall at the time be owned, directly or indirectly, by such Person or (ii) any
other Person of which at least a majority of the voting interest under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled by, and
published in, the most recent Federal Reserve Statistical Release H.15 (519)
which has become publicly available at least two business days prior to the date
fixed for redemption of the Notes following a Change of Control (or, if such
Statistical Release is no longer published, any publicly available source of
similar market data)) most nearly equal to the then remaining Weighted Average
Life to Maturity of the Notes; provided, however, that if the Weighted Average
Life to Maturity of the Notes is not equal to the constant maturity of a United
States Treasury security for which a weekly average yield is given, the Treasury
Rate shall be obtained by linear interpolation (calculated to the nearest
one-twelfth of a year) from the weekly average yields of United States Treasury
securities for which such yields are given, except that if the Weighted Average
Life to Maturity of the Notes is less than one year, the weekly average yield on
actually traded United States Treasury securities adjusted to a constant
maturity of one year shall be used.
"Unrestricted Subsidiary" of any Person means (i) any Subsidiary of such
Person that at the time of determination shall be or continue to be designated
an Unrestricted Subsidiary by the Board of Directors of such Person in the
manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The
Board of Directors may designate any Subsidiary (including any newly acquired or
newly formed Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary
owns any Capital Stock of, or owns or holds any Lien on any property of, the
Company or any other Subsidiary of the Company that is not a Subsidiary of the
Subsidiary to be so designated; provided that (x) the Company certifies to the
Trustee that such designation complies with the "Limitation on Restricted
Payments" covenant and (y) each Subsidiary to be so designated and each of its
Subsidiaries has not at the time of designation, and does not thereafter,
create, incur, issue, assume, guarantee or otherwise become directly or
indirectly liable with respect to any Indebtedness pursuant to which the lender
has recourse to any of the assets of the Company or any of its Restricted
Subsidiaries. The Board of Directors may designate any Unrestricted Subsidiary
to be a Restricted Subsidiary only if (x) immediately after giving effect to
such designation, the Company is able to incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in compliance with the
"Limitation on Incurrence of Additional Indebtedness" covenant and (y)
immediately before and immediately after giving effect to such designation, no
Default or Event of Default shall have occurred and be continuing. Any such
designation by the Board of Directors shall be evidenced to the Trustee by
promptly filing with the Trustee a copy of the Board Resolution giving effect to
such designation and an officers' certificate certifying that such designation
complied with the foregoing provisions.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the sum of the total of
the products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"Wholly Owned Restricted Subsidiary" of any Person means any Restricted
Subsidiary of such Person of which all the outstanding voting securities (other
than in the case of a foreign Restricted Subsidiary, directors' qualifying
shares or an immaterial amount of shares required to be owned by other Persons
pursuant to applicable law) are owned by such Person or any Wholly Owned
Restricted Subsidiary of such Person.
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<PAGE> 87
REGISTRATION RIGHTS
Holders of the New Notes are not entitled to any registration rights with
respect to the New Notes. The Company entered into the Registration Rights
Agreement with the Initial Purchaser for the benefit of the holders of the Old
Notes, pursuant to which the Company agreed that it would, at its cost, by
August 24, 1998, use its best efforts to cause a registration statement (the
"Registration Statement") to be declared effective under the Securities Act
relating to the exchange of Old Notes for registered notes. The Registration
Statement of which this Prospectus is a part constitutes the registration
statement for purposes of the Registration Rights Agreement. Upon the
Registration Statement being declared effective, the Company will offer the New
Notes in exchange for surrender of the Old Notes. The Company will keep the
Exchange Offer open for not less than 30 days (or longer if required by
applicable law) after the date the notice of the Exchange Offer is mailed to the
holders of the Old Notes. For each Old Note surrendered to the Company pursuant
to the Exchange Offer, the holder of such Old Note will receive a New Note
having a principal amount equal to that of the surrendered Old Note. Under
existing Commission interpretations, the New Notes would in general be freely
transferable after the Exchange Offer without further registration under the
Securities Act; provided, however, that in the case of broker-dealers, a
prospectus meeting the requirements of the Securities Act be delivered as
required. The Company has agreed for a period of 180 days after consummation of
the Exchange Offer to make available a prospectus meeting the requirements of
the Securities Act to any broker-dealer for use in connection with any resale of
any such New Notes acquired as described below. A broker-dealer which delivers
such a prospectus to purchasers in connection with such resales will be subject
to certain of the civil liability provisions under the Securities Act and will
be bound by the provisions of the Registration Rights Agreement (including
certain indemnification rights and obligations).
In the event that applicable interpretations of the staff of the Commission
do not permit the Company to effect such an Exchange Offer, or if for any other
reason the Exchange Offer is not consummated by September 23, 1998, the Company
will, at its cost, (a) as promptly as practicable, file a shelf registration
statement with respect to the resale of the Old Notes (the "Shelf Registration
Statement") covering resales of the Old Notes, (b) use its best efforts to cause
the Shelf Registration Statement to be declared effective under the Securities
Act and (c) use its best efforts to keep effective the Shelf Registration
Statement until two years after its effective date. The Company will, in the
event of the Shelf Registration Statement, provide to each holder of the Old
Notes copies of the prospectus, which is a part of the Shelf Registration
Statement, notify each such holder when the Shelf Registration Statement for the
Old Notes has become effective and take certain other actions as are required to
permit unrestricted resales of the Old Notes. A holder of Old Notes who sells
such Old Notes pursuant to the Shelf Registration Statement generally would be
required to be named as a selling security holder in the related prospectus and
to deliver a prospectus to purchasers, will be subject to certain of the civil
liability provisions under the Securities Act in connection with such sales and
will be bound by the provisions of the Registration Rights Agreement which are
applicable to such a holder (including certain indemnification obligations).
If by September 23, 1998 neither (i) the Exchange Offer is consummated nor
(ii) the Shelf Registration Statement is declared effective, the rate per annum
at which the Old Notes bear interest will increase by 0.5% from and including
such date, until but excluding the earlier of (i) the consummation of the
Exchange Offer and (ii) the effective date of a Shelf Registration Statement.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which is filed as an exhibit to the Registration Statement
of which this Prospectus constitutes a part.
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<PAGE> 88
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain federal income tax considerations
applicable to the exchange of Old Notes for New Notes and the ownership and
disposition of the New Notes by holders who acquire the New Notes pursuant to
the Exchange Offer. This discussion is based on laws, regulations, rulings and
decisions now in effect, all of which are subject to change. The discussion does
not cover all aspects of federal taxation that may be relevant to, or the actual
tax effect that any of the matters described herein will have on, particular
holders, and does not address state, local, foreign or other tax laws. Certain
holders (including insurance companies, tax-exempt organizations, financial
institutions, broker-dealers, taxpayers subject to the alternative minimum tax
and foreign partners) may be subject to special rules not discussed below. The
description assumes that holders of the New Notes will hold the New Notes as
"capital assets" (generally, property held for investment purposes) within the
meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the
"Code").
EACH HOLDER SHOULD CONSULT ITS OWN TAX ADVISOR IN DETERMINING THE FEDERAL,
STATE, LOCAL AND ANY OTHER TAX CONSEQUENCES TO THE PARTICULAR HOLDER OF THE
EXCHANGE OF OLD NOTES FOR NEW NOTES AND THE OWNERSHIP AND DISPOSITION OF THE NEW
NOTES.
EXCHANGE OF NOTES
The exchange of the Old Notes for the New Notes pursuant to the Exchange
Offer will not be treated as an "exchange" for federal income tax purposes
because the New Notes do not differ materially in kind or extent from the Old
Notes, and because the exchange will occur by operation of the terms of the Old
Notes. Rather the New Notes received by a holder will be treated as a
continuation of the Old Notes in the hands of such holder. As a result, no gain
or loss will be recognized on the exchange of Old Notes for New Notes pursuant
to the Exchange Offer.
DISPOSITION OF NEW NOTES
If a New Note is redeemed, sold or otherwise disposed of, the holder
thereof will generally recognize gain or loss equal to the difference between
the amount realized on the redemption, sale or other disposition of such New
Note and the holder's adjusted basis in the New Note. Such gain or loss will be
capital gain or loss, provided that the holder held the New Note as a capital
asset, and will be long-term capital gain or loss if the U.S. Holder has held
the New Note for more than one year at the time of disposition. In certain
circumstances, U.S. Holders that are individuals may be entitled to preferential
treatment for net long-term capital gains, particularly in the case of capital
assets held for 18 months or more at the time of disposition. Subject to the
market discount rules discussed below, such gain or loss will be capital gain or
loss and will be long-term capital gain or loss if, on the date of the sale, a
holder has a holding period for the New Notes (which would include the holding
period of the Old Notes) of more than one year.
Under the market discount rules of the Code, an exchanging holder (other
than a holder who made the election described below) who purchased an Old Note
with "market discount" (generally defined as the amount by which the adjusted
issue price of the Old Note on the holder's date of purchase exceeds the
holder's purchase price) will be required to treat any gain recognized on the
redemption, sale or other disposition of the New Note received in the exchange
as ordinary income to the extent of the market discount that accrued during the
holding period of such New Note (which would include the holding period of the
Old Note). A holder who has elected under applicable Code provisions to include
market discount in income annually as such discount accrues will not, however,
be required to treat any gain recognized as ordinary income under these rules.
Holders should consult their tax advisors as to the portion of any gain that
would be taxable as ordinary income under these provisions.
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<PAGE> 89
BOOK-ENTRY; DELIVERY AND FORM
Except as set forth below, the Notes will initially be issued in the form
of one or more registered Notes in global form without coupons (each a "Global
Note"). Each Global Note will be deposited with, or on behalf of, DTC and
registered in the name of Cede & Co., as nominee of DTC, or will remain in the
custody of the Trustee pursuant to the FAST Balance Certificate Agreement
between DTC and the Trustee.
DTC has advised the Company that it is (i) a limited purpose trust company
organized under the laws of the State of New York, (ii) a member of the Federal
Reserve System, (iii) a "clearing corporation" within the meaning of the Uniform
Commercial Code, as amended, and (iv) a "Clearing Agency" registered pursuant to
Section 17A of the Exchange Act. DTC was created to hold securities for its
participation (collectively, the "Participants") and facilitates the clearance
and settlement of securities transactions between Participants through
electronic book-entry changes to the accounts of its Participants, thereby
eliminating the need for physical transfer and delivery of certificates. DTC's
Participants include securities brokers and dealers (including the Initial
Purchasers), banks and trust companies, clearing corporations and certain other
organizations. Access to DTC's system is also available to other entities such
as banks, brokers, dealers and trust companies (collectively, the "Indirect
Participants") that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly. Holders who are not Participants may
beneficially own securities held by or on behalf of the Depository only through
Participants or Indirect Participants.
The Company expects that pursuant to procedures established by DTC (i) upon
deposit of the Global Notes, DTC will credit the accounts of Participants
designated by the Initial Purchasers with an interest in the Global Note and
(ii) ownership of the Notes will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by DTC (with respect
to the interest of Participants), the Participants and the Indirect
Participants. The laws of some states require that certain persons take physical
delivery in definitive form of securities that they own and that security
interest in negotiable instruments can only be perfected by delivery of
certificates representing the instruments. Consequently, the ability to transfer
Notes or to pledge the Notes as collateral will be limited to such extent.
So long as DTC or its nominee is the registered owner of a Global Note, DTC
or such nominee, as the case may be, will be considered the sole owner or holder
of the Notes represented by the Global Note for all purposes under the
Indentures. Except as provided below, owners of beneficial interests in a Global
Note will not be entitled to have Notes represented by such Global Note
registered in their names, will not receive or be entitled to receive physical
delivery of certificated securities (the "Certificated Securities"), and will
not be considered the owners or Holders thereof under the Indentures for any
purpose, including with respect to giving of any directions, instruction or
approval to the Trustee thereunder. As a result, the ability of a person having
a beneficial interest in Notes represented by a Global Note to pledge or
transfer such interest to persons or entities that do not participate in DTC's
system or to otherwise take action with respect to such interest, may be
affected by the lack of a physical certificate evidencing such interest.
Accordingly, each holder owning a beneficial interest in a Global Note must
rely on the procedures of DTC and, if such holder is not a Participant or an
Indirect Participant, on the procedures of the Participant through which such
holder owns its interest, to exercise any rights of a holder of Notes under the
Indenture or such Global Note. The Company understands that under existing
industry practice, in the event the Company requests any action of holders of
Notes or a holder that is an owner of a beneficial interest in a Global Note
desires to take any action that DTC, as the holder of such Global Note, is
entitled to take, DTC would authorize the Participants to take such action and
the Participant would authorize holders owning through such Participants to take
such action or would otherwise act upon the instruction of such holders. Neither
the Company nor the Trustee will have any responsibility or liability for any
aspect of the records relating to or payments made on account of Notes by DTC,
or for maintaining, supervising or reviewing any records of DTC relating to such
notes.
Payments with respect to the principal of, premium, if any, and interest
on, any Notes represented by a Global Note registered in the name of DTC or its
nominee on the applicable record date will be payable by the Trustee to or at
the direction of DTC or its nominee in its capacity as the registered holder of
the Global Note
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representing such Notes under the Indentures. Under the terms of the Indentures,
the Company and the Trustee may treat the persons in whose names the Notes,
including the Global Notes, are registered as the owners thereof for the purpose
of receiving such payment and for any and all other purposes whatsoever.
Consequently, neither the Company nor the Trustee has or will have any
responsibility or liability for the payment of such amounts to beneficial owners
of interest in the Global Note (including principal, premium, if any, and
interest), or to immediately credit the accounts of the relevant Participants
with such payment, in amount proportionate to their respective holdings in
principal amount of beneficial interest in the Global Note as shown on the
records of DTC. Payments by the Participants and the Indirect Participants to
the beneficial owners of interests in the Global Note will be governed by
standing instructions and customary practice and will be the responsibility of
the Participants or the Indirect Participants and DTC.
CERTIFICATED SECURITIES
If (i) DTC notifies the Company in writing that it is no longer willing or
able to act as a depository or DTC ceases to be registered as a clearing agency
under the Exchange Act and the Issuer is unable to locate a qualified successor
within 90 days, (ii) the Company, at its option, notifies the Trustee in writing
that it elects to cause the issuance of Notes in definitive form under the
Indenture or (iii) upon the occurrence of certain other events, then, upon
surrender by DTC of its Global Notes, Certificated Securities will be issued to
each person that DTC identifies as the beneficial owner of the Notes represented
by the Global Notes. Upon any such issuance, the Trustee is required to register
such Certificated Securities in the name of such person or persons (or the
nominee of any thereof), and cause the same to be delivered thereto.
Neither the Company nor the Trustee shall be liable for any delay by DTC or
any Participant or Indirect Participant in identifying the beneficial owners of
the related Notes and each such person may conclusively rely on, and shall be
protected in relying on, instructions from DTC for all purposes (including with
respect to the registration and delivery, and the respective principal amounts,
of the Notes to be issued).
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that for a period of 180 days after
the Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
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<PAGE> 91
For a period of 180 days after the Expiration Date, the Company will
promptly send additional copies of the Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such document
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer other than commissions or concessions of any
brokers or dealers and will indemnify the holders of the Notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
Following consummation of the Exchange Offer, the Company may, in its sole
discretion, commence one or more additional exchange offers to holders of Old
Notes who did not exchange their Old Notes for New Notes in the Exchange Offer
on terms which may differ from those contained in the Registration Agreement.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by the Company in connection with any such additional exchange offers. Such
additional exchange offers will take place from time to time until all
outstanding Old Notes have been exchanged for New Notes pursuant to the terms
and conditions contained herein.
LEGAL MATTERS
Certain legal matters as to the validity of the issuance of the New Notes
will be passed upon for the Company by Dorsey & Whitney LLP, Minneapolis,
Minnesota. Skadden, Arps, Slate, Meagher & Flom LLP has acted as counsel to the
Company in connection with the Exchange Offer.
EXPERTS
The balance sheets as of December 31, 1997 and 1996 and the statements of
income, changes in shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1997, included in the this Prospectus and
Registration Statement, have been included herein in reliance on the report of
Coopers & Lybrand L.L.P., independent accounts given on the authority of that
firm as experts in accounting and auditing.
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<PAGE> 92
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
Report of Independent Accountants........................... F-2
Financial Statements:
Balance Sheets as of December 31, 1997 and 1996........... F-3
Statements of Income for the years ended December 31,
1997, 1996 and 1995.................................... F-4
Statements of Shareholders' Equity for the years ended
December 31, 1997, 1996 and 1995....................... F-5
Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995.................................... F-6
Notes to Financial Statements............................. F-7 - F-17
</TABLE>
F-1
<PAGE> 93
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Universal Hospital Services, Inc.:
We have audited the accompanying balance sheets of Universal Hospital
Services, Inc. as of December 31, 1997 and 1996, and the related statements of
income, shareholders' equity and cash flows for each of the three years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Universal Hospital Services,
Inc. as of December 31, 1997 and 1996 and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
March 4, 1998
F-2
<PAGE> 94
UNIVERSAL HOSPITAL SERVICES, INC.
BALANCE SHEETS
HISTORICAL AS OF DECEMBER 31, 1997 AND 1996 AND UNAUDITED PRO FORMA AS OF
DECEMBER 31, 1997
<TABLE>
<CAPTION>
UNAUDITED
PRO FORMA
(NOTE 2)
1997 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 197,422
Accounts receivable, less allowance for doubtful accounts
of $775,000 in 1997 and $418,000 in 1996................ $11,500,891 12,123,972 $ 11,500,891
Inventories............................................... 1,356,828 1,256,388 1,356,828
Deferred income taxes..................................... 455,000 708,000 455,000
Other current assets...................................... 1,233,778 1,562,303 3,530,778
----------- ----------- ------------
Total current assets.................................... 14,546,497 15,848,085 16,843,497
Property and equipment:
Rental equipment, at cost less accumulated depreciation... 48,946,130 44,546,290 48,946,130
Property and office equipment, at cost less accumulated
depreciation............................................ 2,965,509 3,497,589 2,965,509
----------- ----------- ------------
Total property and equipment, net....................... 51,911,639 48,043,879 51,911,639
Intangible assets:
Goodwill, less accumulated amortization................... 14,308,704 15,057,516 14,308,704
Other at cost............................................. 419,259 757,396 5,969,259
----------- ----------- ------------
Total assets....................................... $81,186,099 $79,706,876 $ 89,033,099
=========== =========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Current portion of long-term debt......................... $ 211,229 $ 1,957,743 $ 211,229
Accounts payable.......................................... 3,186,964 3,044,392 3,186,964
Accrued compensation and pension.......................... 2,213,841 1,990,640 2,213,841
Other accrued expenses.................................... 810,874 1,184,573 810,874
Book overdrafts........................................... 717,675 858,364 717,675
----------- ----------- ------------
Total current liabilities............................... 7,140,583 9,035,712 7,140,583
Long-term debt.............................................. 33,733,773 35,192,589 111,945,773
Deferred compensation and pension........................... 2,201,318 1,772,692 1,725,318
Deferred income taxes....................................... 5,110,000 4,578,000 5,110,000
Commitments and contingencies (Note 9)
Shareholders' equity (deficiency):
Preferred Stock, $0.01 par value; 5,000,000 shares
authorized, no shares issued and outstanding
Common Stock, $0.01 par value: 10,000,000 shares
authorized (25,000,000 shares on a pro forma basis),
5,480,829 and 5,371,921 shares issued and outstanding in
1997 and 1996 (15,624,464 shares issued and outstanding
on a pro forma basis), respectively..................... 54,808 53,719 156,245
Additional paid-in capital................................ 16,042,715 14,870,153 22,277,755
Retained earnings (accumulated deficit)................... 16,902,902 14,204,011 (59,322,575)
----------- ----------- ------------
Total shareholders' equity (deficiency)................. 33,000,425 29,127,883 (36,888,575)
----------- ----------- ------------
Total liabilities and shareholders' equity
(deficiency)..................................... $81,186,099 $79,706,876 $ 89,033,099
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 95
UNIVERSAL HOSPITAL SERVICES, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Equipment rentals................................. $54,488,572 $50,742,774 $45,869,789
Sales of supplies and equipment, and other........ 5,585,997 6,197,826 7,166,005
----------- ----------- -----------
Total revenues................................. 60,074,569 56,940,600 53,035,794
----------- ----------- -----------
Costs of rentals and sales:
Cost of equipment rentals......................... 13,577,382 13,331,864 11,841,142
Rental equipment depreciation..................... 14,434,891 12,602,442 10,799,372
Cost of supplies and equipment sales.............. 3,837,508 4,422,441 5,352,163
Write-down of DPAP inventories.................... 2,213,045
----------- ----------- -----------
Total costs of rentals and sales............... 31,849,781 32,569,792 27,992,677
----------- ----------- -----------
Gross profit................................... 28,224,788 24,370,808 25,043,117
Selling, general and administrative................. 18,448,092 19,695,301 18,559,504
Shareholder value expenses.......................... 1,719,195 305,804
----------- ----------- -----------
Operating income............................... 8,057,501 4,369,703 6,483,613
Interest expense.................................... 3,011,610 2,518,330 1,784,141
----------- ----------- -----------
Income before provision for income taxes............ 5,045,891 1,851,373 4,699,472
----------- ----------- -----------
Provision for income taxes:
Current........................................... 1,562,000 329,000 1,454,000
Deferred.......................................... 785,000 590,000 495,000
----------- ----------- -----------
2,347,000 919,000 1,949,000
----------- ----------- -----------
Net income................................ $ 2,698,891 $ 932,373 $ 2,750,472
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 96
UNIVERSAL HOSPITAL SERVICES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------ PAID-IN RETAINED SHAREHOLDERS'
COMMON CLASS B CAPITAL EARNINGS EQUITY
------- -------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994........ $37,833 $ 16,684 $15,459,805 $10,521,166 $26,035,488
Sale of 33,311 shares of common
stock to employees under
stock purchase plan.......... 333 197,848 198,181
Repurchase of 40,000 shares of
common stock under stock
repurchase plan.............. (400) (274,600) (275,000)
Conversion of 1,668,353 shares
of Class B common stock to
1,686,353 shares of common
stock........................ 16,684 (16,684)
Issuance of 300 shares of common
stock pursuant to exercise of
stock options................ 3 2,307 2,400
Net income...................... 2,750,472 2,750,472
------- -------- ----------- ----------- -----------
Balance, December 31, 1995........ 54,453 -- 15,385,450 13,271,638 28,711,541
Sale of 24,668 shares of common
stock to employees under
stock purchase plan.......... 247 178,103 178,350
Repurchase of 103,000 shares of
common stock under stock
repurchase plan.............. (1,030) (726,345) (727,375)
Issuance of 4,963 shares of
common stock pursuant to
exercise of stock options.... 49 32,945 32,994
Net income...................... 932,373 932,373
------- -------- ----------- ----------- -----------
Balance, December 31, 1996........ 53,719 -- 14,870,153 14,204,011 29,127,883
Sale of 11,738 shares of common
stock to employees under
stock purchase plan.......... 117 124,970 125,087
Issuance of 97,170 shares of
common stock (net of 4,530
Shares of Common Stock
tendered for exercise of
stock options) pursuant to
exercise of stock options,
including $309,150 of tax
benefit...................... 972 1,047,592 1,048,564
Net income...................... 2,698,891 2,698,891
------- -------- ----------- ----------- -----------
Balance, December 31, 1997........ $54,808 $ -- $16,042,715 $16,902,902 $33,000,425
======= ======== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 97
UNIVERSAL HOSPITAL SERVICES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................. $ 2,698,891 $ 932,373 $ 2,750,472
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation............................. 15,170,804 13,337,178 11,467,163
Amortization............................. 899,875 559,408 296,227
Provision for doubtful accounts.......... 641,035 317,805 297,123
Gain on sales of equipment............... (243,990) (229,548) (291,644)
Write-down of DPAP inventories........... 2,213,045
Deferred income taxes.................... 785,000 590,000 495,000
Changes in operating assets and
liabilities, net of impact of
acquisition:
Accounts receivable.................... (208,719) (663,645) (2,136,984)
Inventories and other operating
assets.............................. 228,085 (1,438,516) (1,569,796)
Account payable and accrued expenses... 29,956 (961,120) 1,763,219
------------- ------------ ------------
Net cash provided by operating
activities........................ 20,000,937 14,656,980 13,070,780
------------- ------------ ------------
Cash flows investing activities:
Rental equipment purchases.................. (18,933,142) (14,466,057) (19,244,437)
Property and office equipment purchases..... (210,968) (744,110) (666,526)
Proceeds from sale of equipment............. 740,280 716,110 529,973
Acquisition of BERS, net of cash acquired... (12,074,854)
Other....................................... 377,839 (290,216) (343,654)
------------- ------------ ------------
Net cash used in investing
activities........................ (18,025,991) (26,859,127) (19,724,644)
------------- ------------ ------------
Cash flows from financing activities:
Proceeds under loan agreements.............. 25,124,000 52,158,000 35,055,000
Payments under loan agreements.............. (28,329,330) (38,976,187) (28,602,333)
Proceeds from issuance of common stock...... 864,501 211,344 200,581
Repurchase of common stock.................. (727,375) (275,000)
Tax benefit of nonqualified stock options... 309,150
Change in book overdraft.................... (140,689) (266,213) 275,616
------------- ------------ ------------
Net cash (used in) provided by
financing activities.............. (2,172,368) 12,399,569 6,653,864
------------- ------------ ------------
Net change in cash and cash equivalents....... (197,422) 197,422 --
Cash and cash equivalents at beginning of
period...................................... 197,422 -- --
------------- ------------ ------------
Cash and cash equivalents at end of period.... $ -- $ 197,422 $ --
============= ============ ============
Supplemental cash flow information:
Interest paid............................... $ 2,987,000 $ 2,329,000 $ 1,766,000
============= ============ ============
Income taxes paid........................... $ 1,778,000 $ 1,388,000 $ 1,347,000
============= ============ ============
Rental equipment purchases included in
accounts payable......................... $ 1,829,581 $ 1,438,837 $ 3,217,757
============= ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 98
UNIVERSAL HOSPITAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS:
Universal Hospital Services, Inc. (the Company or UHS) is a leading
provider of movable medical equipment, service programs and products to
healthcare providers in both the acute and alternate care markets. Through a
national network of UHS district offices, providers have access to the Company's
pool of medical devices through the unique Pay-Per-Use(TM) equipment management
program. This program charges customers only when equipment is in use on a
patient, and is supported by a full range of services including delivery,
training, technical and educational support, inspection and maintenance. The
Company also sells medical products not used in its rental pool and disposable
medical products used in conjunction with the medical equipment it rents.
2. SUBSEQUENT EVENT -- MERGER, FINANCINGS AND RELATED TRANSACTIONS:
On February 25, 1998, the Company completed a merger pursuant to the
Agreement and Plan of Merger (the Merger), dated as of November 25, 1997 between
UHS Acquisition Corp., a newly-formed Minnesota corporation controlled by J.W.
Childs Equity Partners, L.P. (Childs), with and into the Company. In connection
with the Merger, the following occurred:
- The Company's existing shareholders (other than the new senior management
team and certain other continuing members of management) received, in
consideration for the cancellation of approximately 5.3 million shares of
the Company's common stock and options to purchases approximately 344,000
shares of common stock, cash in the aggregate amount of approximately
$84.7 million (net of aggregate option exercise price) or $15.50 per
share.
- The Company repaid approximately $35.5 million ($33.3 million on a pro
forma basis as of December 31, 1997) under existing loan agreements.
- The Company paid fees and expenses of approximately $11.5 million related
to the merger of which approximately $5,550 were capitalized as deferred
financing costs.
- The Company paid approximately $3.3 million in severance payments to
certain noncontinuing members of the Company's management of which
$476,000 had already been accrued.
- The Company received an equity contribution of approximately $21.3
million from Childs and affiliates and the Management Investors.
- The Company issued $100 million in aggregate principal amount of 10.25%
Senior Notes due 2008 (the Senior Notes).
- The Company borrowed approximately $14.3 million under a new Revolving
Credit Facility ($11.5 million on a pro forma basis as of December 31,
1997).
- The Company recognized a tax benefit from the exercise of stock options
of $1.1 million and a tax benefit related to the severance payments to
certain noncontinuing members of the Company's management of $1.2
million.
The transaction was structured as a leveraged recapitalization for
accounting purposes, with all assets and liabilities being carried over at
historical cost.
The Senior Notes mature on March 1, 2008. Interest on the Notes accrues at
the rate of 10.25% per annum and is payable semiannually in cash on each March 1
and September 1 commencing on September 1, 1998. The Senior Notes are
redeemable, at the Company's option, in whole or in part, on or after March 1,
2003 at specified redemption prices plus accrued interest to the date of
redemption. In addition, the Senior Notes have a change of control provision
which gives each holder the right to require the Company to purchase all or a
portion of such holders' Senior Notes upon a change in control, as defined in
the agreement,
F-7
<PAGE> 99
UNIVERSAL HOSPITAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
at a purchase price equal to 101% of the principal amount plus accrued interest
to the date of purchase. The Senior Notes have covenants that restrict the
payment of dividends and require that the Company maintain certain financial
ratios. The Senior Notes are uncollateralized.
Under the new Revolving Credit Facility, the Company may borrow up to $30
million with a maturity date of February 2003. Borrowings bear interest at a
rate of 2.25% over the adjusted Eurodollar Rate as defined in the agreement or
the Banks Base Rate plus 1%. Commencing September 30, 1998, the Eurodollar Rate
and the Banks Base Rate used to calculate such interest rates may be adjusted if
the Company satisfies certain leverage ratios. Borrowings under the Revolving
Credit Facility are collateralized by substantially all assets of the Company.
An unaudited pro forma Balance Sheet as of December 31, 1997, has been
presented in conjunction with the historical Balance Sheets as of December 31,
1997 and 1996, as if the Merger, financings and related transactions discussed
above were completed and effective on December 31, 1997.
3. SIGNIFICANT ACCOUNTING POLICIES:
Inventories:
Inventories consist of supplies and equipment held for resale and are
valued at the lower of cost (first-in, first-out method) or market.
Rental Equipment:
Depreciation of rental equipment is provided on the straight-line method
over the equipment's estimated useful lives of five to seven years. The cost and
accumulated depreciation of rental equipment retired or sold is eliminated from
their respective accounts and the resulting gain or loss is recorded in income.
Property and Office Equipment:
Property and office equipment includes land, buildings, leasehold
improvements and shop and office equipment.
Depreciation of property and office equipment is provided on the
straight-line method over estimated useful lives of thirty years for buildings,
remaining lease term for leasehold improvements, and three to ten years for shop
and office equipment. The cost and accumulated depreciation of property and
equipment retired or sold is eliminated from their respective accounts and the
resulting gain or loss is recorded in income.
Goodwill:
Goodwill represents the excess purchase cost of acquired businesses over
the estimated fair market values of tangible and identifiable intangible assets
acquired and is being amortized on a straight-line basis over lives ranging from
15 to 40 years. Accumulated amortization was $3,395,127 and $2,564,697 as of
December 31, 1997 and 1996, respectively.
Long-Lived Assets:
The Company periodically assesses the recoverability of long-lived assets
(principally rental equipment and goodwill) based on projected income and
related cash flows on an undiscounted basis.
F-8
<PAGE> 100
UNIVERSAL HOSPITAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Revenues:
Equipment is generally rented on a short-term basis and rentals are
recorded in income as earned. Supply and equipment sales are recorded at the
time of shipment.
Income Taxes:
Deferred income taxes are computed using the asset and liability method,
such that deferred tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between financial reporting
amounts and the tax bases of existing assets and liabilities based on currently
enacted tax laws and tax rates in effect for the periods in which the
differences are expected to reverse. Income tax expense is the tax payable for
the period plus the change during the period in deferred income taxes.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The most
significant management estimates relate to the determination of the allowance
for uncollectible accounts receivable and obsolete inventories, estimation of
the useful lives of rental equipment for computing depreciation, assessment of
the recoverability of long-lived assets and self-insured medical reserves.
Shareholder Value Expense:
During the years ended December 31, 1997 and 1996, the Company incurred
$1,719,195 and $305,804, respectively, of nonrecurring expenses consisting
primarily of legal, investment banking and special committee fees associated
with the Company's efforts to evaluate ways to enhance shareholder value.
New Accounting Standards:
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and display of
comprehensive income and its components (revenue, expenses, gains and losses) in
a full set of general-purpose financial statements. Management does not expect
any differences between net income and comprehensive income. The Company will
adopt SFAS No. 130 effective with its year-end 1998 reporting.
The FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information." SFAS No. 131 establishes standards for reporting
operating segment information in both annual reports and interim financial
reports issued to shareholders. The Company is reviewing the requirements of
SFAS No. 131, and has not determined if it will be required to present segment
information beyond the one segment currently presented. SFAS No. 131 is required
to be adopted effective with the Company's year-end 1998 reporting.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
About Pensions and Other Postretirement Benefits," which standardizes the
disclosure requirements for pensions and other postretirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer as useful.
Management has not yet evaluated the effects of this change on its current
pension disclosures. The Company will adopt SFAS No. 132 effective with its
year-end 1998 reporting.
F-9
<PAGE> 101
UNIVERSAL HOSPITAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." This SOP provides guidance on
accounting for the costs of computer software developed or obtained for internal
use. The Company is reviewing the requirements of the SOP and has not determined
if it is applicable to the Company. SOP 98-1 is required to be adopted by the
Company no later than the year ending December 31, 1999.
4. ACQUISITION OF BIOMEDICAL EQUIPMENT RENTAL AND SALES, INC. (BERS):
On August 13, 1996, the Company acquired BERS pursuant to a Stock Purchase
Agreement among the Company and the shareholders of BERS. Pursuant to the
agreement, the Company acquired all of the outstanding capital stock of BERS for
approximately $10.7 million and repayment of approximately $1.6 million of
outstanding indebtedness of BERS. The acquisition was accounted for using the
purchase method. Accordingly, the purchase price was allocated to assets and
liabilities acquired based on their estimated fair values. This treatment
resulted in approximately $7.3 million of cost in excess of net tangible assets
acquired, which is being amortized on a straight-line basis over 15 years. The
estimated fair values of assets and liabilities acquired are as follows:
<TABLE>
<S> <C>
Cash........................................................ $ 217,000
Accounts receivable......................................... 949,000
Rental equipment............................................ 4,221,000
Goodwill.................................................... 7,349,000
Other assets................................................ 852,000
Accounts payable and other liabilities...................... (1,296,000)
-----------
$12,292,000
===========
</TABLE>
BERS' operations have been included in the Company's results of operations
since the date of acquisition.
The following summarized, unaudited pro forma results of operations for the
years ended December 31, 1996 and 1995, assume the acquisition of BERS occurred
as of the beginning of the earliest year presented.
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Total revenues.................................... $60,497,000 $58,977,000
Net income........................................ 616,000 2,457,000
</TABLE>
5. WRITE-DOWN OF DPAP INVENTORIES:
The Company experienced declining sales of Demand Positive Airway Pressure
(DPAP) devices during 1996. Because market acceptance of the DPAP devices did
not meet expectations, the Company's quarterly assessment resulted in a
write-down of $1,030,500 in the second quarter and a charge of $1,182,545 in the
fourth quarter of 1996 to write-off the remaining carrying value of DPAP
inventory and associated supplies and demo units. The DPAP devices were disposed
of in early 1997.
6. BOOK OVERDRAFTS:
The Company does not maintain cash balances at its principal bank under a
policy whereby the net of collected balances and cleared checks is, at the
Company's option, applied to or drawn from a revolving credit facility on a
daily basis.
F-10
<PAGE> 102
UNIVERSAL HOSPITAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. PROPERTY AND EQUIPMENT:
Property and equipment at December 31, consists of the following:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Rental equipment............................................ $122,779,009 $107,441,784
Less accumulated depreciation............................... 73,832,879 62,895,494
------------ ------------
Rental equipment, net..................................... $ 48,946,130 $ 44,546,290
============ ============
Land........................................................ 120,000 120,000
Buildings and leasehold improvements........................ 1,418,658 1,356,042
Office equipment............................................ 5,566,451 5,473,317
------------ ------------
7,105,109 6,949,359
Less accumulated depreciation............................... 4,139,600 3,451,770
------------ ------------
Property and office equipment, net........................ $ 2,965,509 $ 3,497,589
============ ============
Total property and equipment, net......................... $ 51,911,639 $ 48,043,879
============ ============
</TABLE>
8. LONG-TERM DEBT:
Long-term debt at December 31, consists of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
8.10% Series A notes, payable in varying quarterly
installments beginning September 1, 1997, with the
remaining balance due in 2007, uncollateralized........... $ 9,650,000 $10,000,000
7.47% senior notes payable, due in quarterly installments of
$350,000, with the remaining balance due in 2002,
uncollateralized.......................................... 7,100,000 8,500,000
8.29% Series B notes, payable in varying quarterly
installments beginning June 1, 2007, with the remaining
balance due in 2009, uncollateralized..................... 4,000,000 4,000,000
9.60% senior note payable, due in quarterly installments of
$375,000 beginning March 1, 2003, uncollateralized........ 3,000,000 3,000,000
Revolving credit agreement, uncollateralized................ 9,554,000 11,337,000
Capital lease obligations................................... 641,002 313,332
----------- -----------
33,945,002 37,150,332
Less current portion of long-term debt...................... (211,229) (1,957,743)
----------- -----------
Total long-term debt.............................. $33,733,773 $35,192,589
=========== ===========
</TABLE>
Under the revolving credit agreement, the Company could borrow up to
$20,000,000 with a maturity date of June 30, 1999. Interest on borrowings
accrued at a rate of between 1.50% and 2.25% annually over the bank's Reserve
Adjusted Certificate of Deposit Rate (RACD) as defined in the agreement. At
December 31, 1997, the Company's interest rate was 7.42%, based on the bank's
RACD of 5.92%.
The fair value of long-term debt, based on discounted cash flow analysis
using current market interest rates for the same or similar issues of debt as of
December 31, 1997, would be approximately $35,200,000.
F-11
<PAGE> 103
UNIVERSAL HOSPITAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the Merger on February 25, 1998 (see Note 2), the
Company paid all long-term debt balances outstanding at December 31, 1997, with
the exception of the capital lease obligations. Accordingly, the Balance Sheet
as of December 31, 1997 reflects the repayment terms of the new financings. The
current portion of long-term debt at December 31, 1997 consists only of current
maturities related to the capital lease obligations.
9. COMMITMENTS AND CONTINGENCIES:
Rental expenses were approximately $3,100,000, $3,500,000 and $3,300,000
for the years ended December 31, 1997, 1996 and 1995, respectively. The Company
is committed under various noncancellable operating leases for regional sales
and service offices and vehicles with minimum annual rental commitments of the
following:
<TABLE>
<S> <C>
1998........................................................ $2,526,382
1999........................................................ 2,095,075
2000........................................................ 708,015
2001........................................................ 429,899
2002........................................................ 273,762
Thereafter.................................................. 215,789
----------
Total............................................. $6,248,922
==========
</TABLE>
The Company in the ordinary course of business could be subject to
liability claims related to employees and the equipment that it rents and
services. One asserted claim concerning an employment-related matter is pending
against the Company. Asserted claims are subject to many uncertainties and the
outcome of individual matters is not predictable with assurance. Management
believes that any such resolution will not have a material adverse effect on the
financial position or results of operations of the Company.
10. EMPLOYEE BENEFIT PLANS:
The Company sponsors a noncontributory defined benefit pension plan that
covers substantially all of its employees. Plan benefits are to be paid to
eligible employees at retirement based primarily on years of credited service
and on participants' compensation. Plan assets consist primarily of U.S.
Government securities and common stocks.
Pension expense, in thousands, for the years ended December 31, included
the following components:
<TABLE>
<CAPTION>
1997 1996 1995
---- ----- -------
<S> <C> <C> <C>
Service cost of the current year.................. $320 $ 348 $ 273
Interest cost on projected benefit obligation..... 634 598 538
Actual return on assets held in the plan.......... (811) (864) (1,441)
Net amortization and deferral..................... 201 348 951
---- ----- -------
Pension expense................................... $344 $ 430 $ 321
==== ===== =======
</TABLE>
F-12
<PAGE> 104
UNIVERSAL HOSPITAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The funded status of the plan and the amounts shown in the accompanying
Balance Sheets, in thousands, at December 31, consist of the following:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Actuarial present value of:
Vested benefit obligation................................ $6,746 $5,677
Nonvested benefit obligation............................. 315 263
------ ------
Accumulated benefit obligation............................. $7,061 $5,940
====== ======
Projected benefit obligation............................... $9,459 $7,902
Fair value of assets held in plan.......................... 8,177 7,661
------ ------
Unfunded excess of projected benefit obligations over plan
assets................................................... 1,282 241
Net unrecognized loss from past assumption experience
differences.............................................. 206 903
------ ------
Pension liability included in the balance sheet............ $1,488 $1,144
====== ======
</TABLE>
The following assumptions were used to determine the projected benefit
obligation at December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Discount rate.......................................... 7.25% 7.75% 7.25%
Projected compensation increases....................... 4.50% 4.50% 5.00%
Expected return on assets.............................. 8.50% 8.50% 8.50%
</TABLE>
Effective January 1, 1994, the Company adopted a supplemental executive
retirement plan (SERP) designed to make up the shortfall in retirement benefits
caused by limitations specified by the Omnibus Budget Reconciliation Act of
1993. This plan provides supplemental pension benefits to the executive officers
of the Company in addition to the amounts received under the Company's defined
benefit plan described above. This combination of benefits is equivalent to
those benefits which would have been paid under the Company's qualified defined
benefit pension plan without regard to the Internal Revenue Service (IRS)
statutory limitation on qualifying wages. Such benefits will be paid from the
Company's assets. The unfunded accumulated benefit obligation under the plan at
December 31, 1997 and 1996 was $388,000 and $315,000, respectively. The
projected benefit obligation under the plan at December 31, 1997 and 1996 was
$1,064,000 and $1,057,000, respectively. Assumptions used to calculate the
benefit obligations were consistent with the Company's defined benefit pension
plan, except that projected compensation increases were assumed to be 5.5% in
1997 and 1996. The pension expense for the years ended December 31, 1997, 1996
and 1995 related to this plan was $208,000, $154,000 and $138,000, respectively.
Pursuant to the merger on February 25, 1998 (see Note 2), the SERP was
terminated resulting in a curtailment of the plan. The Company paid $475,659 in
settlement of the entire benefit obligations due under the plan and recognized a
gain on curtailment of the plan of $155,962.
The Company also sponsors a defined contribution plan, which qualifies
under Section 401(a) of the Internal Revenue Code and covers substantially all
of the Company's employees. Employees may contribute annually up to a total of
12% of their base compensation either before tax (subject to IRS limitation) or
after tax. The Company matches 50% of the first 6% of base compensation that a
participant contributes to the Plan. For the years ended December 31, 1997, 1996
and 1995, approximately $246,000, $279,000 and $234,000, respectively, was
expensed as contributions to the plan.
F-13
<PAGE> 105
UNIVERSAL HOSPITAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company is self-insured for employee health care costs. The Company is
liable for claims up to $83,250 per family per plan year and aggregate claims up
to 150% of expected claims per plan year. Self-insurance costs are accrued based
upon the aggregate of the liability for reported claims and an actuarially
determined estimated liability for claims incurred but not reported.
11. INCOME TAXES:
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---------- -------- ----------
<S> <C> <C> <C>
Currently payable:
Federal....................................... $1,194,000 $228,000 $1,153,000
State......................................... 368,000 101,000 301,000
---------- -------- ----------
1,562,000.. 329,000 1,454,000
---------- -------- ----------
Deferred:
Federal....................................... 677,000... 445,000 414,000
State......................................... 108,000 145,000 81,000
---------- -------- ----------
785,000 590,000 495,000
---------- -------- ----------
$2,347,000 $919,000 $1,949,000
========== ======== ==========
</TABLE>
Reconciliations between the Company's effective income tax rate and the
U.S. statutory rate for each of the three years ended December 31 follow:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory U.S. Federal income tax rate...................... 34.0% 34.0% 34.0%
State income taxes, net of U.S. Federal income tax
benefit................................................... 6.4 8.7 5.2
Shareholder value expenses.................................. 3.4
Goodwill amortization....................................... 2.0 4.6 1.8
Other....................................................... .7 2.3 .5
---- ---- ----
Effective income tax rate......................... 46.5% 49.6% 41.5%
==== ==== ====
</TABLE>
The components of the Company's overall net deferred tax liability at
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Deferred tax assets:
Accounts receivable....................................... $ 131,000
Accrued and deferred compensation and pension............. $1,118,000 1,025,000
Inventory................................................. 95,000 72,000
Other assets.............................................. 48,000 47,000
Alternative Minimum Tax credit carryforward............... 150,000
---------- ----------
Total deferred tax assets......................... 1,261,000 1,425,000
---------- ----------
Deferred tax liabilities:
Accelerated depreciation.................................. 5,899,000 5,269,000
Other..................................................... 17,000 26,000
---------- ----------
Total deferred tax liabilities.................... 5,916,000 5,295,000
---------- ----------
Net deferred tax liability........................ $4,655,000 $3,870,000
========== ==========
</TABLE>
F-14
<PAGE> 106
UNIVERSAL HOSPITAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
12. SHAREHOLDERS' EQUITY:
Each outstanding share of common stock is entitled to one vote.
In December 1995, each share of the Class B common stock was converted to
one share of common stock through a secondary offering. No proceeds of the
offering were received by the Company.
The Company had a stock repurchase program under which up to 500,000 shares
of the Company's common stock could have been repurchased. Such purchases could
have been made at prevailing prices on the open market, by block purchase or in
private transactions at any time until June 30, 1996. A total of 45,000 shares
have been purchased in the open market pursuant to these authorizations. In July
1996, an additional 300,000 shares were authorized by the Board of Directors for
repurchase. Such purchases could have been made at any time until June 30, 1997.
A total 103,000 have been purchased pursuant to these authorizations. Pursuant
to the Merger on February 25, 1998 (see Note 2), the stock repurchase program
was terminated.
In November 1996, the Company adopted a shareholder rights plan under which
rights to purchase shares of a new series of preferred stock have been declared
as a dividend at the rate of one right for each share of common stock held by
shareholders of record at the close of business on November 21, 1996. Each right
under the shareholder rights plan would have entitled the holder to buy one
1/100th of a share of a new series of junior preferred stock at a price of $40.
The rights would have been exercisable only if a person or group acquired or
made a tender offer for 15% or more of the Company's outstanding common stock
(except in connection with an offer permitted by the Board of Directors and
other limited exceptions). The rights would have been redeemable at 1/10th of a
cent per right at any time prior to a acquisition of a 15% position. The
acquisition described in Note 2 meets the criteria of a permitted offer. As
such, the rights were terminated upon closing of the Merger.
If a person or group acquires 15% or more of the Company's common stock
(except in connection with a permitted offer), each right would entitle its
holder to purchase, at the right's then-current exercise price, the Company's
common stock having a market value of twice the right's exercise price. If the
Company had been acquired in a merger or had sold 50% or more of its assets or
earning power, each right would have entitled its holder to purchase, at the
right's then-current exercise price, the acquiring Company's common stock having
a market value of twice the right's exercise price.
Concurrent with the Merger (see Note 2) the Company's Board of Directors
approved a 10-for-1 split of the Company's common stock. The split was effective
on February 25, 1998, for each share of common stock owned by shareholders of
record after the close of the Merger.
13. STOCK OPTION AND STOCK PURCHASE PLANS:
During 1992 and as amended in 1994, the Company adopted a Long-Term
Incentive and Stock Option Plan, a Director's Stock Option Plan and an Employee
Stock Purchase Plan. Under the Long-Term Incentive and Stock Option Plan
(Incentive and Stock Option Plan), the Company may grant incentive stock
options, stock options and performance awards to the Company's employees. A
total of 600,000 shares of common stock are reserved for issuance under the
Incentive and Stock Option Plan. The Incentive and Stock Option Plan expires in
2002. These options become exercisable in increments over a 3 1/2 year period,
expiring 10 years after the grant date.
The Director's Stock Option Plan (Director Plan) covers nonemployee
directors. Options may be granted annually to eligible directors. Under the
Director Plan, the Company has reserved 75,000 shares of common stock for
issuance. Options under the Director Plan become exercisable six months
subsequent to date of grant, expiring five years after the grant date.
F-15
<PAGE> 107
UNIVERSAL HOSPITAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Pursuant to the Merger on February 25, 1998 (see Note 2), the Long-Term
Incentive and Stock Option Plan and the Director's Stock Option Plan were
terminated with no additional shares available for grant under the plans.
Concurrent with the Merger, 333,701 options granted under the plans were
exercised and sold. The remaining outstanding options were rolled over to and
are covered by new nonqualified and incentive stock option plans established by
the Company concurrent with the Merger. Under the new plans, executive officers
and other key employees of the Company will be granted nonqualified stock
options to purchase up to 7.5% of the outstanding common stock of the Company.
Options granted under the plan will vest in whole or in part within five years
from the date granted based on the achievement of certain EBITDA targets.
Substantially all such unvested options will vest eight years following the date
of grant.
All options were granted with option prices based on the estimated fair
market value of the Company's Common Stock at date of grant.
Stock option activity with respect to the Incentive and Stock Option Plan
and Director Plan is as follows:
<TABLE>
<CAPTION>
INCENTIVE AND STOCK OPTION PLAN DIRECTOR PLAN
--------------------------------- ---------------------------
SHARES 1997 1996 1995 1997 1996 1995
------ --------- --------- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Granted..................... 113,650 108,150 7,500 7,500
Exercised................... (93,700) (4,983) (300) (8,000)
Terminated.................. (4,244) (300) (1,800)
------- ------- ------- ------- ------- -------
December 31:
Outstanding............... 406,723 504,667 396,300 29,000 37,000 29,500
======= ======= ======= ======= ======= =======
Exercisable............... 297,396 278,640 178,273 29,000 37,000 29,500
WEIGHTED AVERAGE
EXERCISE PRICE PER SHARE
Granted..................... $9.12 $6.88 $8.75 $8.25
Exercised................... $7.63 $6.62 $8.00 $8.00
Terminated.................. $8.43 $8.00 $8.00
December 31:
Outstanding............... $7.55 $7.57 $7.12 $7.94 $7.95 $7.75
Exercisable............... $7.25 $7.94
</TABLE>
Options outstanding and exercisable at December 31, 1997 for the Incentive
and Stock Option Plan is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------------ OPTIONS EXERCISABLE
REMAINING WEIGHTED --------------------------
RANGE OF AVERAGE CONTRACTUAL WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICES SHARES LIFE (YEARS) EXERCISE PRICE SHARES EXERCISE PRICE
- --------------- ------- ------------------- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C>
$5.38-$6.88 205,023 7.6 $6.14 162,830 $5.97
$8.00-$9.38 201,700 7.4 $8.99 134,566 $8.79
</TABLE>
Stock options outstanding at December 31, 1997 for the Director Plan had a
range of exercise prices of $6.00 to $8.75 and an average remaining life of 1.92
years.
Under the Employee Stock Purchase Plan, eligible employees may purchase
shares of common stock from the Company through payroll deductions of up to 10%
of the employee's base compensation at a price per share equal to 85% of the
lesser of the fair market value of the Company's common stock as of the first or
last day of each six-month offering period. A total of 225,00 shares are
reserved for issuance under this plan. During 1997 and 1996, respectively,
11,738 and 24,668 shares were purchased by employees under this plan, leaving
58,720 available for purchase at December 31, 1997. Pursuant to the Merger on
February 25, 1998 (see Note 2), the Employee Stock Purchase Plan was terminated.
F-16
<PAGE> 108
UNIVERSAL HOSPITAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." The Company adopted the new standard in 1996. The Company has
continued to measure compensation cost for its Incentive and Stock Option Plan,
Director Plan and Employee Stock Purchase Plan, using the intrinsic value method
of accounting it has historically used and, therefore, the new standard has no
effect on the Company's operating results.
Had the Company used the fair value-based method of accounting for its
Incentive and Stock Option Plan, Director Plan and Employee Stock Purchase Plan
and charged compensation cost against income, over the vesting period, based on
the fair value of options at the date of grant, net income for the years ended
December 31, 1997 and 1996 would have been reduced to the following pro forma
amounts:
<TABLE>
<CAPTION>
PRO FORMA
-------------------------
1997 1996
---------- ---------
<S> <C> <C>
Net income......................................... $2,315,983 $709,168
</TABLE>
The weighted-average grant-date fair value of options granted and stock
purchases under the Employee Stock Purchase Plan during 1997 and 1996 was $3.06
and $5.28, respectively. The weighted-average grant-date fair value of options
and stock purchases under the Employee Stock Purchase Plan was determined
separately for each grant under the Company's various plans by using the fair
value of each option grant on the date of grant, utilizing the Black-Scholes
option-pricing model and the following key assumptions:
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
Risk-free interest rates.................. 5.44% to 5.61% 5.1% to 6.9%
Expected life............................. 0.5 years 0.5 to 8 years
Expected volatility....................... 44.41% 53.2% to 59.4%
Expected dividends........................ None None
</TABLE>
F-17
<PAGE> 109
======================================================
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER
CONTAINED HEREIN OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, CHILDS OR THE INITIAL PURCHASER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY
SECURITY OTHER THAN THOSE TO WHICH IT RELATES, NOR DOES IT CONSTITUTE AN OFFER
TO SELL, OR THE SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 4
Risk Factors.......................... 15
The Recapitalization.................. 21
The Exchange Offer.................... 22
Use of Proceeds....................... 29
Capitalization........................ 29
Unaudited Pro Forma Condensed
Financial Data...................... 30
Selected Historical Financial Data.... 35
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 37
Business.............................. 45
Management............................ 55
Principal Shareholders................ 59
Certain Relationships and Related
Transactions........................ 60
Description of the Revolving Credit
Facility............................ 61
Description of the Notes.............. 63
Certain U.S. Federal Income Tax
Considerations...................... 87
Book Entry; Delivery and Form......... 88
Plan of Distribution.................. 89
Legal Matters......................... 90
Experts............................... 90
Index to Financial Statements......... F-1
</TABLE>
======================================================
======================================================
--------------------
PROSPECTUS
--------------------
$100,000,000
[UHS LOGO]
UNIVERSAL HOSPITAL
SERVICES, INC.
10 1/4% SENIOR NOTES DUE 2008
BTALEX.BROWN
April , 1998
======================================================
<PAGE> 110
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is a table of the Commission registration fee and estimates
of all other expenses to be incurred in connection with the issuance and
distribution of the securities described in this Registration Statement:
<TABLE>
<S> <C>
Commission registration fee................................. $ 29,500
Printing and engraving expenses............................. $ *
Legal fees and expenses..................................... $ *
Accounting fees and expenses................................ $ *
Miscellaneous............................................... $ *
--------
Total............................................. $ *
========
</TABLE>
- ---------------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OTHERS
Article 4 of the Company's Restated Articles of Incorporation, provides
that a director shall not be personally liable to the Company or its
shareholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
Company or its shareholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Sections 302A.559 or 80A.23 of the Minnesota Statutes, (iv) for any transaction
from which the director derived an improper personal benefit or (v) for any act
or omission occurring prior to the date when such Article 4 became effective.
The Bylaws of the Company provide that officers and directors of the
Company and certain others shall be indemnified substantially to the same extent
required or permitted by Minnesota law.
Section 302A.521 of the Minnesota Business Corporation Act provides that a
corporation shall indemnify any person who was or is made or is threatened to be
made a party to any proceeding, by reason of the former or present official
capacity (as defined) of such person, against judgments, penalties, fines,
settlements and reasonable expenses, including attorneys' fees and
disbursements, incurred by such person in connection with the proceeding if
certain statutory standards are met. "Proceeding" means a threatened, pending or
completed civil, criminal, administrative, arbitration or investigative
proceeding, including one by or in the right of the corporation. Section
302A.521 contains detailed terms regarding such right of indemnification and
reference is made thereto for a complete statement of such indemnification
rights.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On February 25, 1998, the Company engaged in a recapitalization (the
"Recapitalization") that was effected through the merger (the "Merger") of UHS
Acquisition Corp. ("Merger Sub"), a newly-formed Minnesota corporation
controlled by J.W. Childs Equity Partners, L.P. ("Childs"), with and into the
Company (and, as the surviving entity after the Recapitalization, the "Surviving
Company").
In connection with the Recapitalization, certain members of the Company's
management team (the "Management Investors") agreed to (i) purchase shares of
the Surviving Company's common stock, and (ii) allow their existing shares and
options to purchase shares of Company common stock to remain outstanding and
"roll over" into shares or options to purchase shares of the Surviving Company's
common stock.
II-1
<PAGE> 111
The Management Investors retained approximately 186,776 shares of Company
common stock, having a total value of approximately $2.9 million based on the
consideration paid in the Merger (including 170,787 shares retained by Mr.
Dovenberg and his spouse that have a total value of approximately $2.6 million
based on the Merger consideration. In addition, upon terms and subject to
conditions contained in Investment Representation and Stock Subscription
Agreements by and between the Surviving Company and each of certain Management
Investors dated February 25, 1998, the Management Investors purchased
approximately 37,143 shares of the Surviving Company's common stock for an
aggregate purchase price of approximately $576,000. Finally, pursuant to certain
Investment Representation and "Roll Over" Subscription Agreements by and among
Childs, Merger Sub and each of certain Management Investors dated February 25,
1998, the Management Investors "rolled over" approximately 101,522 existing
options to purchase shares of the Company's common stock (including 49,449
options to purchase common stock held by Mr. Dovenberg) into options to purchase
shares of common stock in the Surviving Company. In addition, on February 25,
1998, the Company sold $100,000,000 aggregate principal amount of 10 1/4% Senior
Notes due 2008 to BT Alex. Brown Incorporated (the "Initial Purchaser"), less an
aggregate discount to the Initial Purchaser of $3,000,000. The foregoing
transactions were exempt from the registration requirements of the Securities
Act of 1933, as amended (the "Securities Act") in reliance on section 4(2) of
the Securities Act, on the basis that these transactions did not involve a
public offering. In accordance with the agreement pursuant to which the Initial
Purchaser purchased the 10 1/4% Senior Notes due 2008, such Initial Purchaser
agreed to offer and sell such notes only to "qualified institutional buyers" (as
defined in Rule 144A under the Securities Act) and outside the United States in
compliance with Regulation S under the Securities Act. Except for the
transactions described above, there have not been any recent sales for
unregistered securities.
II-2
<PAGE> 112
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
3. ARTICLES OF INCORPORATION AND BY-LAWS.
*3.1 Restated Articles of Incorporation of the Company.
*3.2 Amended and Restated By-Laws of the Company.
4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS,
INCLUDING INDENTURES.
4.1 Indenture, dated as of February 25, 1998, by and between the
Company and First Trust National Association as Trustee,
relating to the Company's 10 1/4% Senior Notes Due 2008
(Incorporated by reference to Exhibit (a)(8) to Amendment
No. 4 to Schedule 13E-3/A of the Company filed on March 19,
1998 (the "13E-3/A")).
4.2 Amendment dated as of February 23, 1998 to the commitment
letter entered into by and between Childs and Bankers Trust
Company on January 22, 1998 (Incorporated by reference to
Exhibit (a)(5) to the 13E-3/A).
4.3 Credit Agreement dated as of February 25, 1998 by and
between the Company and Bankers Trust Company (Incorporated
by reference to Exhibit (a)(6) to the 13E-3/A).
5. OPINIONS.
*5.1 Opinion of Dorsey & Whitney, LLP, special counsel to the
Company.
10. MATERIAL CONTRACTS.
10.1 Registration Rights Agreement dated February 25, 1998 by and
between the Company and the BT Alex. Brown Incorporated
(Incorporated by reference to Exhibit (a)(9) to the
13E-3/A).
10.2 Form of Stock Subscription Agreement dated as of February
25, 1998 by and between the Company and certain Management
Investors (Incorporated by reference to Exhibit (c)(14) to
the 13E-3/A).
10.3 Form of Stockholders' Agreement dated as of February 25,
1998 by and among the Company each of the Management
Investors and each of the Childs Investors (Incorporated by
reference to Exhibit (c)(15) to the 13E-3/A).
10.4 Employment Agreement between the Company and David E.
Dovenberg, dated November 25, 1997 (Incorporated by
reference to Exhibit 8 to Schedule 13D filed December 4,
1997 (File No. 5-42484)).
*10.5 Universal Hospital Services, Inc. 1998 Stock Option Plan.
12. RATIO OF EARNINGS TO FIXED CHARGES.
12.1 Statement regarding the computation of ratio of earnings to
fixed charges for the Company.
23. CONSENTS.
23.1 Consent of Coopers & Lybrand L.L.P.
*23.2 Consent of Dorsey & Whitney, LLP, special counsel to the
Company (included in Exhibit 5.1).
24. POWERS OF ATTORNEY.
25. FORM T-1.
*25.1 Statement of Eligibility and Qualification on Form T-1 of
First Trust National Association, as Trustee under the
Indenture relating to the Company's 10 1/4% Senior Exchange
Notes due 2008.
27 Financial Data Schedule.
99. MISCELLANEOUS.
*99.1 Form of Letter of Transmittal.
*99.2 Form of Notice of Guaranteed Delivery.
*99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees.
*99.4 Form of Letter to Clients.
</TABLE>
- ---------------
* To be filed by amendment.
(b) Financial Statement Schedule:
Schedule II -- Valuation and Qualifying Accounts.
II-3
<PAGE> 113
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no
more than 20 percent change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table
in the effective registration state-ment.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the Securities
offered therein, and the offering of such Securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the Securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned Registrant hereby undertakes:
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, office or controlling person in connection with the Securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE> 114
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF BLOOMINGTON, STATE OF
MINNESOTA, ON APRIL 9, 1998.
UNIVERSAL HOSPITAL SERVICES, INC.
By /S/ DAVID E. DOVENBERG
---------------------------------
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1993, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
/s/ DAVID E. DOVENBERG Director, President and April 9, 1998
- -------------------------------------------- Chief Executive Officer
DAVID E. DOVENBERG
/s/ JERRY D. HORN Director April 9, 1998
- --------------------------------------------
JERRY D. HORN
/s/ STEVEN G. SEGAL Director April 9, 1998
- --------------------------------------------
STEVEN G. SEGAL
/s/ EDWARD D. YUN Director April 9, 1998
- --------------------------------------------
EDWARD D. YUN
/s/ GERALD L. BRANDT Vice President, Finance April 9, 1998
- -------------------------------------------- and Chief Financial
GERALD L. BRANDT Officer
</TABLE>
II-5
<PAGE> 115
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
In connection with our audits of the financial statements of Universal
Hospital Services, Inc. as of December 31, 1997 and 1996, and for each of the
three years in the period ended December 31, 1997, which financial statements
are included in the prospectus and Registration Statement, we have audited the
financial statement schedule listed in Item 21(b) herein.
In our opinion, this financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material aspects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Minneapolis Minnesota
March 4, 1998
II-6
<PAGE> 116
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
UNIVERSAL HOSPITAL SERVICES, INC.
<TABLE>
<CAPTION>
COL. B COL. C COL. D COL. E
---------- ------------------------ ---------- ----------
COL. A ADDITIONS
- --------------------------------------- ------------------------
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING COSTS AND OTHER FROM END
DESCRIPTION OF PERIOD EXPENSE ACCOUNTS RESERVES OF PERIOD
----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Reserve for Doubtful Accounts:
Year Ended December 31, 1997....... $ 418,000 $ 641,035 $ 130,931 $ 414,966 $ 775,000
Year Ended December 31, 1996....... $ 410,000 $ 317,805 $ 103,416 $ 413,221 $ 418,000
Year Ended December 31, 1995....... $ 235,000 $ 297,123 $ 4,450 $ 126,573 $ 410,000
Reserve for Inventory Obsolesence:
Year Ended December 31, 1997....... $ 204,560 $ 205,640 $ 0 $ 200,867 $ 209,333
Year Ended December 31, 1996....... $ 162,664 $2,322,121 $ 0 $2,280,225 $ 204,560
Year Ended December 31, 1995....... $ 168,000 $ 100,650 $ 0 $ 105,986 $ 162,664
</TABLE>
<PAGE> 117
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- ------- ----------- ----
<C> <S> <C>
3. ARTICLES OF INCORPORATION AND BY-LAWS.......................
*3.1 Restated Articles of Incorporation of the Company...........
*3.2 Amended and Restated By-Laws of the Company.................
4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS,
INCLUDING INDENTURES........................................
4.1 Indenture, dated as of February 25, 1998, by and between the
Company and First Trust National Association as Trustee,
relating to the Company's 10 1/4% Senior Notes Due 2008
(Incorporated by reference to Exhibit (a)(8) to Amendment
No. 4 to Schedule 13E-3/A of the Company filed on March 19,
1998 (the "13E-3/A")).......................................
4.2 Amendment dated as of February 23, 1998 to the commitment
letter entered into by and between Childs and Bankers Trust
Company on January 22, 1998 (Incorporated by reference to
Exhibit (a)(5) to the 13E-3/A)..............................
4.3 Credit Agreement dated as of February 25, 1998 by and
between the Company and Bankers Trust Company (Incorporated
by reference to Exhibit (a)(6) to the 13E-3/A)..............
5. OPINIONS....................................................
*5.1 Opinion of Dorsey & Whitney, LLP, special counsel to the
Company.....................................................
10. MATERIAL CONTRACTS..........................................
10.1 Registration Rights Agreement dated February 25, 1998 by and
between the Company and the BT Alex. Brown Incorporated
(Incorporated by reference to Exhibit (a)(9) to the 13E-
3/A)........................................................
10.2 Form of Stock Subscription Agreement dated as of February
25, 1998 by and between the Company and certain Management
Investors (Incorporated by reference to Exhibit (c)(14) to
the 13E-3/A)................................................
10.3 Form of Stockholders' Agreement dated as of February 25,
1998 by and among the Company each of the Management
Investors and each of the Childs Investors (Incorporated by
reference to Exhibit (c)(15) to the 13E-3/A)................
10.4 Employment Agreement between the Company and David E.
Dovenberg, dated November 25, 1997 (Incorporated by
reference to Exhibit 8 to Schedule 13D filed December 4,
1997 (File No. 5-42484))....................................
*10.5 Universal Hospital Services, Inc. 1998 Stock Option Plan....
12. RATIO OF EARNINGS TO FIXED CHARGES..........................
12.1 Statement regarding the computation of ratio of earnings to
fixed charges for the Company...............................
23. CONSENTS....................................................
23.1 Consent of Coopers & Lybrand L.L.P..........................
*23.2 Consent of Dorsey & Whitney, LLP, special counsel to the
Company (included in Exhibit 5.1)...........................
24. POWERS OF ATTORNEY..........................................
25. FORM T-1....................................................
*25.1 Statement of Eligibility and Qualification on Form T-1 of
First Trust National Association, as Trustee under the
Indenture relating to the Company's 10 1/4% Senior Exchange
Notes due 2008..............................................
27 Financial Data Schedule.....................................
99. MISCELLANEOUS...............................................
*99.1 Form of Letter of Transmittal...............................
*99.2 Form of Notice of Guaranteed Delivery.......................
*99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees................................
*99.4 Form of Letter to Clients...................................
</TABLE>
- ---------------
* To be filed by amendment.
<PAGE> 1
EXHIBIT 12.1
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
DETERMINATION OF RATIO OF EARNINGS TO FIXED
CHARGES:
Earnings before provision for income taxes......... $3,692 $3,496 $4,699 $1,851 $5,046
Write-down of DPAP inventories..................... 2,213
Shareholder value expenses......................... 306 1,719
Fixed charges
Interest expense.............................. 1,071 1,268 1,784 2,518 3,012
------ ------ ------ ------ ------
Earnings before fixed charges...................... $4,763 $4,764 $6,483 $6,888 $9,777
====== ====== ====== ====== ======
Fixed charges
Interest...................................... $1,071 $1,268 $1,784 $2,518 $3,012
------ ------ ------ ------ ------
Ratio of earnings to fixed charges............ 4.4x 3.8x 3.6x 2.7x 3.2x
====== ====== ====== ====== ======
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1
(File No. 333- ) of our report dated March 4, 1998, on our audits of the
financial statements and financial statement schedule of Universal Hospital
Services, Inc. We also consent to the reference to our firm under the caption
"Experts".
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
April 8, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 12,275,891
<ALLOWANCES> 775,000
<INVENTORY> 1,356,828
<CURRENT-ASSETS> 14,546,497
<PP&E> 129,884,118
<DEPRECIATION> 77,972,479
<TOTAL-ASSETS> 81,186,099
<CURRENT-LIABILITIES> 7,140,583
<BONDS> 0
0
0
<COMMON> 54,808
<OTHER-SE> 33,000,425
<TOTAL-LIABILITY-AND-EQUITY> 81,186,099
<SALES> 4,878,728
<TOTAL-REVENUES> 60,074,569
<CGS> 3,837,508
<TOTAL-COSTS> 31,849,781
<OTHER-EXPENSES> 1,719,195
<LOSS-PROVISION> 641,035
<INTEREST-EXPENSE> 3,011,610
<INCOME-PRETAX> 5,045,891
<INCOME-TAX> 2,347,000
<INCOME-CONTINUING> 2,698,891
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,698,891
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1>No reported EPS as Company taken private in recapitalization on February 25,
1998..
</FN>
</TABLE>
